From the Editorial Desk - anan-ng.organan-ng.org/wp-content/uploads/2016/02/journaljanmar2011.pdf · employment, alleviate poverty ... Governance is a social contract between the

ISSN 0189-0662 VOLUME 19 NO. 1, JANUARY - MARCH, 2011

The Nigerian Experience in Small and Medium Scale Enterprises (SMEs) Cluster Formation.................................................41

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Information and Communication Technology Investments and Financial Institutions Earnings: An Appraisal of Nigerian Commercial Banks ...........................31

Economic Implication of the Collapse of Public Enterprises in Nigeria.......................37

From the Editorial Desk......................................3

From the President’s suite..........................4

A Comparative Study of the Performance of Banks and Non-Banks Listed on the Nigerian Stock Exchange...............................22

Towards A Credible Election in 2011: The Role of Professional Accountants in a Fragile Democracy.......................................5

The role of External Auditors in Corporate Governance in Nigeria.....................17

A study of the application of queuing model in First Bank of Nigeria Plc, Onitsha to improving service

The editor presents a brief summary of each of the published articles. He explains in detail the authors’ views on their write-ups and suggestions.

ANAN President Chief (Mrs) Iyamide F. Gafar welcomed all members to the first session of this year’s Mandatory Continuing Professional Development (MCPD) programme in Enugu, Enugu State. While mentioning the importance of the programme, she stated that it is very important for them to know more about the International Financial Reporting Standards system. She encouraged the members to take the MCPD programme and all others seriously in terms of attendance and acquisition of knowledge.

The paper goes down memory lane to bring to light what Nigerians have been suffering since independence, over 50 years ago. It states clearly that it does seem there is a collapse of governance and leadership in Nigeria. It reminds its readers that the major event in the country this year is a national election into the various legislative houses and a host of executive offices. It hopes that the expectation is that the year will proffer solution for our problems. It advises professional accountants to bring their knowledge to play in the areas of monitoring, evaluation and control.

The write-up examines the extent to which the auditing profession has contributed to the growth of corporate governance culture in Nigeria. It states that the role has been hindered by the failure of auditor independence arising from some negative factors. It however recommends prohibition of non-audit services, strengthening of professional education and training, among others.

The study compares the performance of banks with non-banks listed on the Nigerian Stock Exchange to determine the economic justification, If any, for the observed preference for shares of banks by Nigerian investors. It assesses the profitabililty of the individual banks listed on the Exchange. Its findings reveal that there are siginficant differences in the profitability of individual banks listed on the Exchange.

The study investigates information and communication technology investments in Nigerian financial institutions with emphasis on their impact on earnings. It uses the annual statements of accounts of eight sampled banks to collect its data. The study reveals that ICT investments do not contribute significantly to the earnings of Nigerian banks. The study recommends that Nigerian banks should develop internal maintenance skills and invest more on latest ICT technologies.

The paper reviews the implication of public enterprises collapse to Nigerian economy and make suggestions for the sustainability of the public enterprises in Nigeria. It hopes that with the will, commitment and right value re-orientation among all stakeholders, a lot of progress will be achieved in the match to sustainable economic recovery.

The write-up showcases the potentials and challenges of Nigerian SME clusters. It provides a framework for involving competitive clusters in Nigeria. It concludes that SME cluster development has much potentials to generate employment, alleviate poverty, industralise Nigeria and bring about general socio-economic improvement.

Understanding Queuing Theory and Its Contributions to Modern Management thought.................................................................47

The article examines the concept of queuing theory and its historical development, the basic components of a queuing model, the operating characteristics of a queuing system, as a waiting line model. It concludes that queuing theory allows management to improve on existing queuing system. It helps managers to compare the costs or customers wait in line against the costs of adding more facilities.

The paper is an empirical study of the applicability of queuing model in First Bank of Nigeria Plc, Onitsha. It is aimed at identifying the features of a queuing system, the causes of long queues and assessing the effects of long queues on the service delivery of the bank. It recommends that the bank should use the principle of multiple channels to diversify their operation bases.

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Information and Communication TechnologyInvestments and Financial Institutions Earnings: An Appraisal of Nigerian Commercial BanksFrom the President’s Suite

Economic Implication of Collapse of Nigerian Public EnterprisesTowards A Credible Election in 2011: The Role of

Professional Accountants in a Fragile Democracy41 The Nigerian Experience in Small and Medium

Scale Enterprises (SMEs) Cluster FormationThe Role of External Auditors in Corporate Governance in Nigeria

A Comparative Study of the Performance of Banks and Non-Banks Listed on the Nigerian Stock Exchange

47 Understanding Queuing Theory and itsContributions to Modern Management

50 A Study of the Application of Queuing Modelin First Bank of Nigeria Plc, Onitsha to Improving Service Delivery

3 31From the Editorial Desk

In this Issue...

Council Members

Francess Iyamide Gafar (Mrs), B.Sc. (Hons), FCNA - PresidentHajia Maryam Ladi Ibrahim, B.Sc. (Hons), FCNA - 1st Vice PresidentAlhaji Sakirudeen Tunji Labode, FCNA - 2nd Vice PresidentAnthony Chukwuemeka Nzom, MBA, FCNA - TreasurerAlhaji Shehu Usman Ladan, FCNA - Membership SecretarySamuel Okwuchukwu Nzekwe, MBF, FCNA - Immediate Past PresidentAlhaji Ibrahim Habu Sule, MBA, Ph.D, FCNA - MemberAlhaji Mohammed Abatch Geidam, B.Sc, FCNA - MemberAlhaji Sa’ad M. Wuro-Chekke, FCNA - MemberJames Ekerare Neminebor, FCNA - MemberProfessor Mohammad Akaro Mainoma, Ph.D, FCNA - MemberNapoleon Waibibia Adda (JP), B.A., MBA, FCNA - Member

Past PresidentsJohnson Kolawole Odumeru, FCNASunday Babalola Aloba, FCNAAlhaji Umar Hamid, FCNAProf. Edet Robinson Iwok, FCNA

AdministrationTerkaa Iyorhyer Gemade, B.Sc (Hons), MBA, FCNA - Registrar / Chief ExecutiveSunday Aniogor Ekune, B.Sc. (Hons), M.Sc, CNA - Assistant RegistrarAnthony Adebeso Shodiya, MBF, MNIM, ACTI, FCNA - Assistant Chief AccountantMusiliu Kola Suleimon, MBA, CNA - Head, Internal AuditAyoola Idowu, B.A. (Hons), M.Sc., ANIPR - Head, Public RelationsJohn O. T. Amah, Esq. LLB (Hons) B.L - Legal Officer

Nigerian College of AccountancyProf. Ambrose A. Okwoli, B.Sc. (Hons), MBA, Ph.D, ACTI, FCNA - Director-GeneralMuhammad S. Sanusi, B.Sc. (Hons), MBA, M.Sc. ACTI, CNA - Director of Studies

Editorial BoardChairman/Editor-in-Chief: Prof. W. E. Herbert (KSC), B.Sc. (Hons), MAcc, Ph.D, ACTI, CFE, FCNADeputy Editor-in-Chief: Terkaa Iyorhyer Gemade, B.Sc (Hons), MBA, FCNAMembers: Dr. Vincent N. Ezeabasili, B.Sc. (Hons), MBA, Ph.D, CNAEditor: Obafemi Olusanya

The views expressed in this journal are not necessarily those of the Association. The Association reserves the right to edit, amend, cancel or refuse to publish any article or advertisement without prior notification. Authors should note that they are fully responsible for their papers and claims thereof. The Editorial Board and/or the Association cannot be held

liable for any acts of plagiarism or misleading/misrepresentation of facts.

All correspondence should be addressed to the Secretariat of the Association,250, Herbert Macaulay Street, P.M.B. 1011, Yaba, Lagos. Tel: 01-7900926

E-mail: [email protected] Web Address: www.anan.org.ng

1Certified National Accountant JANUARY - MARCH, 2011

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Volume 19 Number 1 January - March, 2011

From the Editorial Desk

From the President’s Suite

ArticlesTowards A Credible Election in 2011: The Role of Professional Accountants in a Fragile Democracy

The Role of External Auditors in Corporate Governance in Nigeria

A Comparative Study of the Performance of Banks and Non-Banks Listed on the Nigerian Stock Exchange

Information and Communication TechnologyInvestments and Financial Institutions Earnings: An Appraisal of Nigerian Commercial Banks

Economic Implication of Collapse of Nigerian Public Enterprises

The Nigerian Experience in Small and MediumScale Enterprises (SMEs) Cluster Formation

Understanding Queuing Theory and ItsContributions to Modern Management

A Study of the Application of Queuing Model in First Bank of Nigeria Plc, Onitsha to Improving Service Delivery

Editor

President

Benjamin C. Osisioma

Alphonsus S. Anichebe

Ugochukwu C. Nzewi

Adebayo Adejola

Miskom Attahiru

Onyima Jude K.

Ngige Chigbo

Onyeizugbe Chinedu U.

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Contents

Certified National Accountant JANUARY - MARCH, 2011 3Certified National Accountant JANUARY - MARCH, 2011

From The Editorial Desk

From The Editorial DeskThis Edition consists of eight articles, two related on governance, two on Nigerian enterprises, two on queuing model and the last two on banking. The editorial suite presents a brief summary of each of these seriatim.

Towards A Credible Election In 2011: The Role of Professional Accountants In A Fragile DemocracyThe 2011 National Election is the greatest expectation of all Nigerians this year. Governance is a social contract between the ruler and the ruled, where the citizens, in exchange for surrending their rights of sovereignty, demand from the rulers some basic essentials. But the fragility of Nigeria’s democracy is clearly delineated in a governance and leadership crisis. The coming election holds out a new beginning to restore the majesty of the democratic process. The professional accountants must therefore seek to address definite standards for transparency and accountability in governance, strengthen the reporting process and generate indices for good governance.

A Comparative Study of The Performance of Banks and Non-Banks Listed on the Nigerian Stock ExchangeProfit maximization has historically been assigned as an objective criterion of business in a free market economy. Hence, the level of profitability is often used as a measure of a firm’s efficiency. For more than five years, capital investors in the Nigerian Stock Exchange had shown marked preference for shares of banks. Findings, however, revealed that the Nigerian banking system is very high risk and that there is a significant difference in the profitability of the individual banks. The implication is that the clamour for bank stock by Nigerian investors has no rational basis.

The Role of External Auditors In Corporate Governance in NigeriaAuditors are engaged as agents under contract of the agents who manage the operations of the business for their role to be effective, Auditors must be seen to be truly independent of the organization on whose accounts they report. The auditing profession has a definite role to play in enthroning a strong corporate governance culture in the Nigerian corporate environment. But the profession in Nigeria suffers from many lapses. The various profession accountancy bodies must take great steps to address the weaknesses in professional education and training, also the auditor should always act as the monitor to the whole system to ensure adherence to ethical values.

Information And Communication Technology Investments And Financial Institution Earnings: An Appraisal of Nigerian Commercial BanksThe revolutionary potential of new ICTs lies in their capacities to instantaneously connect vast network of individuals and organizations across great geographic distances at very little cost. They have transformed businesses, revolutionized learning and knowledge sharing. There have been claims by virtually all banks of acquiring the ICT technology to support their operations. But they use it as a source of competitive advantage and not as strategic necessity to improve profitability. The Nigerian banks are yet to derive maximum benefits from the use of ICT. Banks need to train their staff in the maintenance of ICT’s applications internally.

Economic Implication of Collapse Of Nigeria Public EnterprisesPublic enterprises in Nigeria were established to propel social economic development and to guard against the control of the economy from foreign domination and exploitation. Hence a larger proportion of the national budget has been voted for the creation and sustenance of public enterprises. With all these efforts, it is sad to note that the performance of public enterprises has been replete with varying contradictions. Successive administrations come up with different kinds of reform in an attempt to address the crises Nigerian economy faced, but the implementation had been less than satisfactory. However, with the will, commitment and right value of re-erientation among all stakeholders, a lot of progress will be achieved in our match to sustainable economic recovery.

The Nigerian Experience in Small and Medium Scale Enterprises (SMEs) Cluster FormationThe major problem of small and medium enterprises (SMEs) is being isolated. Clustering raises the capacity of SMEs to respond to opportunities and also to reap the gains of economics of scale. There are differences between the SMEs in advanced countries and their counterparts in Nigeria. The difference lies in the importance attached to the SME sector by the government of each country. Most of the SME clusters in Nigeria appear to have an informal structure. SME cluster development has much potentital to generate employment, alleviate poverty and industrialise Nigeria. Expanding SME clusters and increasing their effectiveness demand that supporting institutions should be strengthened in order to offer friendly services to these clusters.

Understanding Queuing Theory and Its Contributions to Modern Management ThoughtQueuing theory is concerned with mathematical study of queues or waiting lines, formulating mathematical models of queues and measuring performance using these models. The purpose of queuing theory is to help management analyze a situation and help design a system, such that the sum of the costs of customer waiting and costs of idle facilities is at a minimum. It allows management to improve on existing queuing system and also helps managers to compare the cost of making work or customers wait in line against the cost of adding more facilities.

A Study of the Application of Queuing Model in First Bank of Nigeria Plc, Onitsha to Improving Service DeliveryThe concepts of providing and receiving services are inherent in today’s specialized and interdependent world. One of the most common phenomena of modern life is that customers requiring services arrive a set of service facilities that provide services. If upon arrival the service facilities are free, the customers get service without delay, if not the customers wait in a queue or get discouraged. The application of queuing model will improve service delivery, especially in banks. The long queues noticed at various public facilities in Nigeria smirk off negative comments in the society. To improve service delivery in banks, the management should improve effectiveness and efficiency in the Data processing unit at the headquarters. The management should also device strategies for diverting customers’ attention when waiting.


ROLE OF PROFESSIONAL ACCOUNTANTS IN DEMOCRACY

AbstractThe fragility of Nigeria's democracy is clearly delineated in a governance and leadership crisis, an unrelenting corruption scourge, an escalating poverty index in the face of extreme wealth, an unabating surge in levels of youth unemployment, and a highly unproductive economic ethos. The 2011 National Election holds out the promise of a new beginning - to restore the majesty of the democratic process, transform and reform the Nigerian politician, work for a deliberate de-escalation of corruption and sleaze in public affairs, and enthrone rule of law. The accountant must therefore seek to address definitive standards for transparency and accountability in governance, strengthen the reporting process, generate indices for good governance and apply investigative and audit skills in curbing the scourge of corruption in the polity.

Towards A Credible Election In 2011:The Role Of Professional Accountants In A Fragile Democracy

Benjamin Chuka Osisioma

IntroductionMr. Bigstuff is an enigma of sorts: physically, he is an excellent specimen of manhood with great and awesome potentials and possibilities. Well educated and well endowed, he lives in comparative luxury and comfort, and courts the company of the high and mighty. He earns a fat salary every month at his place of work, yet the word goes round behind his back, that he finds it difficult to put in a hard day’s work to justify his good pay. His consumption pattern is the talk of the town; he consumes more than he earns, and has become a perennial debtor in the neighbourhood. In spite of his apparent wealth, his children are routinely thrown out of school for non-payment of fees, his wife pines away for lack of filial care and conjugal affection, and his in-laws and relations are sentenced to a life of poverty and penury. He is ageing, but he has no retirement plans - nothing set aside for the rainy day. His age mates are now responsible grand-fathers, but he is neither impressed nor disturbed. He blames everyone but himself for his squandered potentials - his enemies, his detractors and witches and wizards. Sadly, he will some day pass away, unsung and unmourned.

The story of Mr. Bigstuff very much reads like the story of Nigeria. On October 1, 2010, Nigeria celebrated fifty years of nationhood - a golden anniversary for a not-so-golden nation. Described by critics as a failed state, Nigeria stands in the words of Wole Soyinka as “the open sore of the African continent”. Writing the Prologue in a national weekly on Nigeria’s Fiftieth Anniversary, an editor put it in these words:

...On October 1, 1960, we were all elated. The Union Jack was coming down while the green

white green flag of Nigeria was going up. We all had springs in our feet; we had self-confidence that approached bombast; we thought that with our vast resources, men and materials and our unspeakable enthusiasm, we would circle the globe. Our politicians even made us to believe that we would have the proverbial ‘chicken in every pot’. Fifty years later, we have neither chicken nor pot. We are like a false pregnancy: every symptom is there but no baby (Ekpu, 2010).

Governance is a social contract between the ruler and the ruled, where the citizens in exchange for surrendering their rights of sovereignty, demand from the rulers some basic essentials: Peace and Security in society, Provision of Social Amenities, Transparency and Accountability in affairs of State, Rule of Law as opposed to Rule of Man, and Freedom of Association. Again, informed critics hold the view that Nigerian governments have failed Nigerian citizens in this regard. In the words of Williams (2010):

For the past twenty-five years, succeeding military governments and their civilian variants have promised to deliver on democracy and prosperity for all Nigerian stakeholders. Towards this twin objective, they have demanded enormous sacrifices and belt-tightening on the part of the citizenry. Like all law-abiding people, the citizens did their bit and waited patiently. Unfortunately, at the end of the day, neither genuine democracy nor economic prosperity has been the lot of the Nigerian people. Ten years into civilian rule, rather than democracy, what we have is electoral brigandage and the worst

4 JANUARY - MARCH, 2011Certified National Accountant

FROM THE PRESIDENT’S SUITE

International Financial Reporting Standards(IFRS) System, a Must for Accountants

It is indeed my pleasure to welcome you to this first session of the year 2011 Mandatory Continuing Professional Development (MCPD) programme of the Association holding in Enugu, the capital of Enugu State. Incidentally this is the last session I will be addressing as the President of the Association. I must confess to you that it has been two exciting and hectic years.

We all should by now be familiar with the objectives of the programme, so I need not restate them here but let me emphasize the need for training and re-training of all members. We are operating in a very dynamic environment, so we all need to be on top of what we are doing. These training programmes expose workers to new ideas and encourage them to incubate best practices recognized globally. They also aid in knowledge production and validation which cannot be got from the classroom.

This year, the theme of the Programme is centred around contemporary issues that are affecting the accounting profession. In these challenging times, there is need to look into issues which have become very relevant and have called for increased attention and demand reliable decision-making information. Therefore, we have chosen as our theme ‘Contemporary Issues in Accounting Development’.

Sub-themes are:1. Adoption of International Financial Reporting Standards

in Nigerian issues and challenges.2. Accounting and Corporate Governance3. Environmental Accounting Principle and Practice4. Social Responsibility Accounting5. Introduction to Extensible Business Reporting Language

(IXBRL).

As you are all aware, Nigeria is adopting the IFRS system of reporting and by 2012 Nigeria is expected to have attained full convergence. It is therefore very important for both providers and users of all financial and accounting information to be on top of the situation and be conversant with what is expected of them.

As professionals, there is need to be responsive to global demands particularly in the area of adopting similar reporting standards which will allow for uniformity of reporting, whereby accounts prepared anywhere globally will have universal interpretation. Corporate Governance is an issue that is now occupying the front burner.

Environmental Accounting and Social Responsibility Accounting have become part of the challenging financial, social and environmental times. The Accountancy profession therefore has a crucial role to play in ensuring the quality, reliability and credibility of financial and non-financial management reports. This is why at the last World Congress of Accountants in Malaysia, attention was focused on creating

Sustainable Value.” We as accountants have a key role to play to ensure that the values created within and outside the organisation we operate are sustainable and preserved.”

The world has become a global village with internet and other fast linking communication systems. Financial reporting has changed radically over the past 10 years. New technology and more sophisticated performance metrics have increased the amount and quality of information requirement and generated. There is need, therefore, to upgrade the communication of business information and to create a standard language of reporting which can be used anywhere in the world. XBRL provides major benefits in the preparation, analysis and communication of business information. It is the intention of this paper to introduce members to these languages; its advantage and other benefits that could be derived for those supplying or using financial data.

To ensure active participation by participants we have introduced additional discussants for each paper who would lead to the discussion of each paper. Participants are encouraged to take active part in this.

For those attending the MCPD programme for the first time, let me emphasise that attending this programme at least once a year is mandatory for members as attendance revalidates your membership of the Association. It is also one of the benchmarks for:a. Conferment of Fellows,b. Obtaining and review of professional license,c. Membership of Committee,d. Appointment of Council,e. Chairman and Executive member of Branches, andf. Representing the Association in various forms.

In light of this, I encourage you all to take this and all other programmes seriously in terms of attendance and acquisition of knowledge. There is no end to the acquisition of knowledge.

I also implore you to be innovative and flexible as it will allow you to respond readily and better to the current demands, that the society has placed on the profession.May I use this opportunity to thank His Excellency and his Government for the support to the State branch of the Association. I assure him that our members in the employment of the State Government will continue to contribute usefully to the development of the State. I wish you all fruitful deliberations.

God bless you, God bless ANAN, God bless Nigeria.

Chief (Mrs) Iyamide F. Gafar, FCNAPresident, Chairman of Council andChairman of Board of Governors,Nigerian College of Accountancy



form of political banditry ever visited on a people. The political defenestration of the people is matched only by the official gangsterism and the elevation of kleptocracy as national ideology. The result has been massive alienation and the clear de-legitimisation of the post-colonial state in Nigeria.

It does seem that there is a collapse of governance and leadership in Nigeria. In every sphere, at every level, on every turn - the story is the same: men are more adept and committed to securing passport to leadership positions than in providing real leadership. The 2009 UNDP Human Development Report for Nigeria puts it most graphically:

Nigeria surely has a scorecard; but it is an unimpress ive one re la t ive to i t s contemporaries in the 1960s and 1970s. What is different about Nigeria is that its pover ty and human deve lopment performance are largely avoidable. Forty-nine years of managing its own affairs has shown that the country has immense potential, is blessed with human and natural resources, yet exhibiting significant deprivation in the midst of plenty. ... In many respects, the economy has shown traits of a complex co loura t ion tha t de f i e s conventional classification. It is a country of extremes - extreme wealth on the one hand and extreme want on the other - which makes it possible for some 20 per cent of the population to own 65 per cent of its national wealth (2009: 27).

For 16 years (1980 to 1996), the total poverty head count for Nigeria rose from 27.2% of the population to 65.6%. This gives an annual average poverty growth rate of 8.83%. However, between 1996 and 2004, the figure declined to 54.4% of the population. Meanwhile, the core poor rose from 6.2% in 1980 to 29.3% in 1996, and declined to 22.0% in 2004. (HDR, 2009: 63). Nigeria’s human development index, at 0.499 lags behind those of Cameroun 0.514, Sudan 0.526, India 0.609, Botswana 0.646, South Africa 0.670, Equatorial Guinea 0.717, Malaysia 0.823, and Korea 0.928 (HDR, 2008).

The American Secretary of State, Hillary Clinton put it most succinctly:

...What Africa needs is not more strong men, it needs more strong democratic institutions that will stand the test of time. Without good governance, no amount of oil, no amount of aid, no amount of effort can guarantee

Nigeria’s success. But with good governance, nothing can stop Nigeria. ... We believe that delivering on roads and on electricity and on education and all the other points of that agenda will demonstrate the kind of concrete progress that the people of Nigeria are waiting for (2009).

It is against this sombre picture that we ponder at the promise of 2011. The year holds so much promise, yet so much fear and trepidation; it could herald the birth pangs for an emerging African power, or represent the death knell for a society in a progressive state of atrophy. It was the Rev. Martin Luther King Jr who said:

We must use time creatively in the knowledge that the time is always ripe to do right. ... Now is the time to make real the promise of democracy and transform our pending national elegy into a creative psalm of brotherhood. Now is the time to lift our national policy from the quicksand of social injustice to the solid rock of human dignity. Now is the time...

The major event on the national calendar for 2011, is a national election into the various legislative houses, and into a host of executive offices at the federal and state levels in Nigeria. In more stable economies, elections are normal and routine, and they are taken in stride without any convulsions or disruptions. In Nigeria, elections are life and death issues; the future of our nation may well depend on them. From the 1964 elections which culminated in the military coup of 1966, to the 1983 elections, down to the elections of 1999, 2003 and 2007, the story has been one of national embarrassment.

The expectation is that 2011 will proffer solution for our intractable electoral problems, challenge us to credible and effective national leadership, redefine best-practice standards for excellence in governance and public administration, abate the scourge of corruption, re-engineer economic and social transformation, and aid the building of a stable and prosperous polity. The challenge is how to unravel the rationally inexplicable and morally unjustifiable turn of events in our motherland, and give generations yet unborn the prospect of inheriting a banner without stain. It was Richard Nixon who said:

Each moment in history is a fleeting time, precious and unique. But some stand out as moments of beginning, in which courses are set that shape decades or centuries. This can be such a moment.

For this generation of Nigerians, 2011 must be a watershed, a turning point. There is very little choice. We



may be disappointed if we fail; but we are doomed if we do not try.

ii Re-inventing Nigeria’s Fragile DemocracyThe satyrical lines in a Nigerian weekly captures the fragile nature of Nigeria’s democracy:

Koko wants to be a lawmaker in the Nigerian political environment. In his own words, his ambition is to make laws banning his landlord from increasing his rent, and empowering himself, when he builds his own house, to make laws preventing his tenants from suing him if he issued them with a quit notice. He is in love with the powers and perks of the Nigerian legislator. His attraction is for a job where he sits for three days in the week, observes every public holiday, and goes on long vacations like school children. Then, he is entitled to whatever portion of the national budget he likes, buys luxury cars for oversight functions, collects DTAs for foreign travels, be reimbursed the cost of air tickets, and secure enough war chest to build a second gate to heaven (Excerpted from Egbemode, Sunday Sun, 2010).

Satyrical? Obviously yes! However, it drives home the point that ours is a system founded, not on service and sacrifice, but on personal and selfish gain. In the process of writing this paper, the author received a text message that is currently making the rounds:

Do you know that it costs tax payers N290 million yearly to maintain each member of our National Assembly, in a country where nothing works and 80% of the population earn below N300 a day? A working day’s earning of a Senator is more than a yearly income of a doctor; it is more than the salary of 42 Army Generals or 48 Professors or 70 Commissioners of Police or more than twice the pay of the US President or nine times the salary of US Congress men. Please say No to looting of Nigeria in the name of democracy by sending this text to at least five others.

Again, the authenticity of these figures and statistics, is far from certain, and some element of exaggeration is not unlikely; yet, they emphasize the fragile nature of our political situation. Even as the National Assembly reels under the weight of the widely publicized criticism of the Governor of Nigeria’s Central Bank, the generality of Nigeria’s public is not convinced that our legislators are doing exactly what they were sent to do. Sad to say, the

same goes for every other arm or level of government.

Ikenna Obi (2009) in making an assessment of Nigeria’s leadership and governance profile observed:

Nigeria is experiencing a governance crisis. As banks in the country are crumbling under the weight of good corporate governance requirements from the Central Bank, so is the political leadership class receiving hard knocks for not delivering good governance to the benefit of its citizenry. The 2009 Ibrahim Index of African Governance ... ranked

thNigeria 35 out of 53 African countries rated in the index. In the West African sub-region,

thNigeria ranked 11 out of 16 countries, lagging behind Niger Republic.

The Ibrahim Index is managed and published by the MO Ibrahim Foundation - an African initiative that aims at improving the quality of governance in Africa. Its Index of African Governance seeks

“to provide a robust, comprehensive and quantifiable tool for civil society and citizens to hold governments to account, to stimulate debate on governance and to provide a framework to assess governance quality in Africa” (Obi, 2009). The Index ranks good governance in four major areas:

* Safety and Rule of Law;* Participation and Human Rights;* Sustainable Economic Opportunity; and,* Human Development.

In these four areas, in the West African sub-region, it is remarkable that countries like Cape Verde, Ghana and Sao Tome led with the scores of 78.0, 66.0 and 60.2 respectively, while Nigeria scored 46.5. The giant of Africa is thus proving the point that

“possessing mere potentials seems to be inadequate for transformation to greatness. Good leadership is critical as it provides the required governance that can exploit all the potentials for the good of the citizenry” (Obi, 2009).

The MO Foundation also instituted an annual Prize for good leadership in Africa. In 2007, the prize was won by Joaquim Alberto Chissano, former President of Mozambique. In 2008, Festus Gontebanye Mogae of Botswana received the prize. The question remains: when and which Nigerian leader will ever receive such prize?

The 1970-74 Perspective Plan for Nigeria defined the national objectives to be the building of: A united, strong



and self-reliant nation; A great and dynamic economy; A just and egalitarian society; A land of bright and full opportunities for all citizens; and, A free and democratic society.Furthermore, the 2001 Kuru Declaration envisions the following:

To build a truly great African, democratic country, politically united, integrated and stable, economically prosperous, socially organized, with equal opportunity for all, and responsibility from all, to become the catalyst of [African] Renaissance, and m a k i n g a d e q u a t e a l l - e m b r a c i n g contributions, sub-regionally, regionally and globally (NEEDS: viii, 2004).

The 2011 Elections must hold the key to unlocking the potentials of our country. Our expectations are that 2011 would offer us the opportunity to reinvent the politics of our nation, transform the economy, secure the polity, care for the underprivileged, and provide responsible, responsive and credible leadership. In specific terms, the governance challenge for 2011 and beyond, can be spelt out in these words:• Restoring the Majesty of Democracy - This is represented by the catch-phrase: One Man One Vote. The opportunity for choice and selection among contending parties, the sanction of the ballot box, the discipline of rule of law and due process, the extraction of accountability from representatives, and the recourse to the people for renewal of mandate, constitute the beauty of the democratic process. It is doubtful whether Nigeria can ever have genuine electoral reform without three definitive actions:* Insistence on internal democracy in the different parties - Parties must be weaned away from the horse-trading associated with consensus arrangements. A true democrat should not fear the sanction of the electoral process;* Insistence that INEC accepts responsibility for proving that it has faithfully discharged its task after an election. Since the INEC holds all the aces in the nation’s elections, it should be made accountable for its actions. The burden of proof needs to be reassigned, to hold the Commission responsible to prove that it has conducted elections according to the laws of the land.* Electoral offences bothering on fraud, should attract criminal prosecution in our law courts. A situation where no one is penalised for hi-jacking the people’s franchise, does not lend itself to responsible governance.Those who make peaceful change impossible, make violent change imperative;• Reforming, Re-branding and Renewing the Nigerian Politician to be part of the solution, not the problem of

the nation. The prevalent picture today of the typical Nigerian politician, is one who is greedy for monetary and personal gain, a stranger to good morals, character and principles, a purveyor of falsehood, a manipulator, and a saboteur to the cause of his people. There must be a change. Further more, under Nigerian laws, a public servant is deemed to have reached his peak at the age of 60 years; thereafter, decline in productivity sets in and he is retired compulsorily by law. Those who do work of a highly cerebral nature, like Professors and High Court Judges, are allowed up to the age of 65 and 70. It is not clear why the politician never attains a retirement age, even when he has become a clear liability to the nation. There is need for change.• Strengthening the fundamentals of the Nigerian economy - This will be quite a tall order. It calls for massive provision of employment, reducing the level of poverty in the land, laying the groundwork for genuine economic transformation, provision of industrial infrastructure for growth and development, and efficient generation and distribution of power. As Herbert (2008) puts it:In implementing Mr. President’ 7-Point agenda, the Administration needs to constantly have at the back of its mind this Nigerian whose back has been broken by poverty and unemployment, living in one single room with his wife and children with serious power outages, no potable water and improper sanitation. To improve the life of this Nigerian is the goal of economic policy, and all the elegant ‘macro’, ‘mini’, ‘mega’ economic policies that will not solve his problems today will not earn his approval.• Elected Representatives that truly Represent those who Elected Them - This calls for an end to the tyranny of the legislature. Today, the legislature has virtually hijacked the budgeting and oversight functions, arrogated to itself the right to change our constitution by themselves and for themselves, determine how much of our common wealth and patrimony they would want to take, and force themselves upon the psyche of the nation. The times demand a change;• Security - This translates into ability of government to protect lives and property, provide food and employment, reduce level of poverty, and raise the quality of life of the ordinary Nigerian;• Leadership that is genuinely interested in serving, rather than being served. Nigeria’s need today is for a transformational leader who has the ability to create the vision, inspire and motivate followers, and through consistent, persistent and focussed guidance, empower individuals to achieve results greater than originally contemplated. Transformational leaders fundamentally alter the parameters of the status quo through providing a vision for the future and then investing time and effort in

22Certified National Accountant 9Certified National Accountant JANUARY - MARCH, 2011


having others share that vision. They encourage creativity and innovativeness in subordinates, allow followers a wide latitude of self-expression, and cut a clear path between responsibility for performance and the consequent rewards that follow;• Rule of Law - This is defined in its two major perspectives: * Ends-based emphasis encompassing a government bound by law, equality before the law, law and order, predictable and efficient judgements, and human rights. It presupposes that in a state governed by law, “God and reason alone rule”; whereas “passion perverts the minds of rulers, even if they are the best of men” (Shehu, 2006);* Institutional attributes such as existence of comprehensive laws, well-functioning and accessible courts, and trained and effective law enforcement agencies.

There is also need for transparency and accountability in government where the people know what, why, when, whom and how of the government as essential components of governance.• Deliberate De-escalation in the Level of Corruption in the Polity - Corruption has penetrated the warp and woof of the Nigerian society. The boss and his messenger, the police officer and the recruit, the classroom teacher and his student, the politician and the voter, the judge and the lawyer, the pastor and his parishioner - none can remain untainted by this stigma. Two main factors have played upon each other in destroying the moral fibre of the nation: abject POVERTY and malevolent GREED. The greed of the ruling class, plays upon the poverty of the larger majority of the people to perpetuate this scourge. Further more, there is clear insincerity among the leaders in truly addressing the problem; they have tasted the forbidden apple of power, wealth and personal ambition nurtured and grown by corruption, and most of their protestations against corruption is mere lip service. Further still, the battle against corruption is being prosecuted by men who are not morally qualified to lead in the crusade. It takes a revolutionary to call forth a revolution; and revolutionaries are moral purists and idealists, who would rather place their own necks on the chopping block than go against the grain of their convictions. Finally, corruption has been seen to be very rewarding in Nigeria; hardly is any one truly called to account for corrupt crimes of the past. The society forgets and forgives; and the old foxes learn new tricks and continue with their old ways. Until people perceive that it does not pay to be corrupt, they will not steer away from that course. May the year 2011 see the dawn of a corrupt-free Nigeria.

Leadership position in Nigeria has become an all-comers’ affair. Men who occupy prime positions of leadership in the land must be men who by their temperament, education, antecedents, and vision are equipped to give service, sacrifice and inspiration in charting the course for the nation. It was Ray Ekpu of the Newswatch who wrote:

Our Constitution provides for a School certificate level education for an aspirant to the high office of President. No School Certificate holder today can be the Managing Director of a bank, or the Manager of a high grade restaurant, or a Driver at the National Agency for the Control of AIDS (you need an OND to be a driver at NACA). Yet we have School Certificate as the qualification for the most important office in the land at a time of great complexity in world affairs. If our entry qualification is this low, how can we expect a high level of achievement from the occupant since higher education is part of the preparation for high office (October 4, 2010).

One of the more enduring challenges for leadership in Africa, remains the example of Nelson Mandela, a man fired by the zeal for his fatherland. At great personal risk, he put his life on the line to salvage his people from bondage to colonialism, apartheid, poverty and want. He paid a great price - nearly thirty years in the gulag, dehumanised, brutalised, scandalised and thoroughly traumatised. With great patience, candour and humility, he paid his dues. The day came that he swept to victory on a groundswell of the people’s vote. The despised last citizen soon became the first citizen. He assumed power as President of the Republic of South Africa without any bitterness, without any hint of vindictiveness, and without any thought of revenge. He became the glue that held his nation together, a symbol that inspired young and old to great nobility of character and personality. Such was his popularity that if he wanted to be President for life, it was easily within his grasp. But no, he declined a second term in office. He would rather that the younger ones were given the opportunity to grow; he paid the price, but held out the prize to his country men. When he was the anvil, he bore a tremendous lot; but when he became the hammer, he was most reluctant to strike. When Nigeria produces a Mandela, our national hurts and divisions will be healed.

Reinventing Nigeria’s fragile and tottering democracy is a tall order; it is by no means a piece of cake. However, it is a challenge in nation building which the present and future generation of leaders must find a way to address.

*Continued on page 12

10

Governor Santai Woos Accountants

Have you paid your Annual Subscription? According to our regulation, payment of annual

subscription is due on January 1, please pay up all your outstanding dues.

Have you changed youraddress or just relocated? Then,

please communicate your new address/location to

our Secretariatimmediately.

JANUARY - MARCH, 2011Certified National Accountant

ANAN Releases 2011 MCPD Programme’s Time Table

ANAN Joins Umbrella of Professional Bodies

**Governor of Taraba State, His Excellency Danbaba Suntai receiving gift items from ANAN President, Chief (Mrs) Iyamide F. Gafar during the latter’s visit to the state governor at Jalingo, Taraba State House.

overnor Danbaba Suntai of Taraba State has solicited the support of Gaccountants to partner with the state

government to join hands with the state in harnessing the potentials that God has given the state.

The Governor who made this known while declaring open the Mandatory Continuing Professional Development (MCPD) programme for the North East Zone organised by the Association of National Accountants of Nigeria (ANAN)

in Jalingo, hinted that the state is blessed with agricultural and tourism potentials and diverse solid minerals.

According to the state Chief Executive, ANAN would be the first requirement for industrial development when the Mambilla Hydro Electricity project takes off, adding that ANAN would provide all necessary statistics while implementing the project.

In her address, the President of the

Association, Chief (Mrs) Iyamide Francess Gafar said the Association engaged its members in professional development through mandatory continuing professional development programmes, workshops, seminars and conferences. She said that the training and retraining were expected to be of tremendous benefits to participants in identifying their strength and areas which needed improvement.

The ANAN President outlined the principal objectives of the programme which include provision of requisite skills to members in adapting to the evolution of latest developments that w o u l d r e s u l t i n t o c h a n g i n g responsibilities and economies in Nigeria and internationally. She said others were to encourage members to discover new opportunities open to them in the current economies and financial challenges.

ssoc ia t ion of Nat ional A c c o u n t a n t s o f N i g e r i a A(ANAN) has released this year’s

Mandatory Continuing Professional Development (MCPD) programme’s time table which includes the zones and venues of the events.

The programme has been arranged in five sessions with the first session scheduled to hold in Enugu, in Enugu

State from February 28 to March 3, the second session will be held in Minna, Niger State commencing from 23rd to 26th May, while the third session is slated for Damaturu, Yobe State between 25th to 28th July, when the fourth comes up in Birnin-Kebbi State on the 12th to 15th September and the last for the year is to hold in Ibadan, Oyo State from 5th to 8th December.

he umbrella bodies of professional bodies in Nigeria, Association of TProfessional Bodies of Nigeria

(APBN) has admitted the Association of National Accountants of Nigeria (ANAN) into its fold following the approval of the Board of APBN.

ANAN became the 25th member of the Body alongside bodies like the NIA, NIOB, NSE, NIESV, NIM, NIQS, NCS, NIS, NITP, ICAN, CIBN, ICCON, ICSAN, CIIN, CIS, CITN, AMLSN,

NMA, IPAN, PSN, IMCON, NBA, CIPMN and NIPR. Members have the benefi ts of part icipating in the programmes and activities of the Assoc ia t ion , such as seminars , workshops, conference lectures at the national and state chapter levels of the association, discount and concessions at fee-paying programme they are entitled to journals/newsletter and other publications o f the Assoc ia t ion a s we l l a s awards/recommendations applicable through APBN.

The time table reflected the theme: Contemporary Issues in Accounting Development. The course fee as stated in the time table is twenty-five thousand naira (N25,000) to cover course materials and lunch only.

Members are advised to attend any of the sessions convenient for them while attendance is compulsory for all members of the Association at least once a year whether practising or not.

The picture on the cover page shows (L-r) Mr. Mike Willias, Chairman XBRL Board; ANAN President, Chief (Mrs) Iyamide F. Gafar and Director of XBRL Services, IFRS Foundation, Mr. Olivier Servais at the just concluded World Congress of Accountants in Malaysia.

Cover Picture

11

Yabawa To Chair Nigerian College of Accountancy Convocation


ANAN StaffersReceive Award

ANAN Rolls Out New Guidelines For Practitioners

*ANAN President, Chief (Mrs) Iyamide F. Gafar presenting gift items to His Royal Highness, Dr. J.U. Nnaji Eze Odezuluigbo III of Nike during her visit to his royal highness at his palace.

t was indeed a remarkable moment for the staff of the IAssociation of National

Accountants of Nigeria (ANAN) as the management of the Association rewarded 12 staffers with cash gifts for outstanding performance and conduct in year 2010.

The recognition came during the end of year party held for staff in Lagos a t t he Assoc ia t ion ’s Registrar’s residence.

Five employees got corporate Awards, four received Neatest Award and two got most social/friendly Award with one staff each receiving most punctual and most hardworking staff, respectively.

Announcing the award, the Registrar/Chief Executive of the Association, Chief Terkaa Gemade said the most hardworking staff is Chukwudi Oputa, the most punctual staff are Phina Odueh and Bunde Anande, while the neatest staff are Linda Odiase, Raymond Asuquo, Alhaji Rahmon A. Bello, John Amah and Ayoola Idowu.

While presenting the cash award to the recipients, he thanked members of staff for their unalloyed support and contributions to the actualisation of the set goal and objective of the secretariat. He then implored others to emulate the award recipients and perform excellently in the coming year.

he Minister of State for Finance, Hajia Yabawa Lawan Wabi will Tchair the Nigerian College of

Accountancy (NCA) Convocation coming up this month.

The convocation which will be the 4th of its kind since the establishment of the College in 1984 will be held at the Nigerian College of Accountancy’s

Permanent site in Kwall, Bassa Local Government, Plateau State with the convocation lecture on Friday, 18th March, 2011.

Other programmes are conferment of Fellowship awards on some well-deserving individuals and awards to the best students in different courses.

s a way of improving the practising standard of its Amembers, the Association of

National Accountants of Nigeria

(ANAN) has rolled out new guidelines for issuance of Practising Certificate and Licence.

Report from the Association indicated that prospective practitioners would now be issued with practising licence alongside practising certificate which were hitherto being used before the new guidelines.

However, applicants for both the practising certificate and practising licence must have satisfied the requirements spelt out in the new guidelines before the issuance.

Some of the requirements for issuance of practising certificate include meeting of the Association’s requirement and personal competence of the applicants, while those seeking for practising licence must need the Association’s requirements in terms of infrastructure, accommodation, personnel, equipment and other items as specified in the ANAN practitioners’ forum.

t a n d a r d a n d E t h i c s Committee was committed Sin i t s r espons ib i l i ty

towards achieving its set goals and objectives of the Association. In recent t ime, landmark achievements were made in the following areas: Reviewing of ANAN Handbook, Setting the first ANAN Standards on Auditing and Ethical Conduct of Members.

ANAN Handbook was printed last in 2008. Various relevant publications by ANAN up-to-date were collated and materials considered relevant were added to the Handbook. The committee

Standard and Ethics Committee Reviews Handbookreviewed the Handbook and effected amendments and recommendations of the Council.

The Committee was committed to set the first ten (10) ANAN Standards on Auditing. The set Standards were launched in October last year during the last Annual National Conference at the International Conference Centre, Abuja.

The Standard and Ethics Committee in its responsibility to monitor and regulate the conduct of members of the Association in line with professional standards adopted many resolutions in various meeting held as to improve ethical conduct of members.



What remains is to define where the professional accountant comes into the picture.

iii The Role Of The Professional AccountantA professional accountant is one who has acquired broad-based knowledge and skills of accounting practice, and has been formally admitted into a recognized body with formal charter, and made subject to rules of conduct that conform to the highest ideals of expert protocol. He holds his position by virtue of statute and professional competence, a position secured and bordered by law. He has been found worthy in character and learning, a fit and proper person, to be entrusted with the liberty to operate at the commanding heights of the nation’s economy. He recognizes that he has a social contract with the wider society, yet he holds the confidence and trust of the people, borne out of his commitment to their highest good. He traces his connections to the best in international accounting practice world-wide, yet has his roots firmly embedded in a people’s need for growth and development, and drive for economic emancipation. He is a man of ideas, a critique extra-ordinary, an intellectual in his own rights, a storehouse of knowledge, skills and competencies. That is the professional accountant.

Accounting is a system of principles and techniques which permits the classification, recording and interpretation of financial information for purposes of decision making. It has developed over time, an essential stewardship function which enables owners of the resources of an entity to extract accountability from the managers who are entrusted with the task of running the organization. The custodianship function is at the root of corporate governance, and provides the basis for the sacred trust upon which modern business is built. In the fulfilment of this general objective, accounting fulfils two basic tasks: a measurement function, and a communication function. It seeks to ascertain the result of a period of productive operation, the flows and ebbs in an organization’s financial position, the extent of value added after a period of operations, and the liquid resources available to the firm to settle maturing obligations and oil the machinery of production. Once the measurement process is complete, it is communicated to interested parties in the form of reports for purposes of decision making.

Thus, accounting primarily seeks to satisfy a reporting function. The stewardship function, even in the public sector domain, is a sacred trust, since the resources of state are collectively owned by the constituent public. It also serves a planning and control function - the

planning of projects and programmes, their costing for best practices and most efficient returns, the monitoring of performance at various output levels, and the application of corrective action to ensure compliance with planned targets. The goal is to attain the ends of efficiency, economy and effectiveness in resource utilization, and to ensure a cost-benefit and cost-minimization approach, consistent with pre-determined goals and objectives. Finally, accounting also serves a decision making function which provides a basis for evaluating the effects of alternative decisions, and the investment outlets where funds will be committed. Budgetary commitment of funds, and programmes and projects are decided upon as a result of analysis under this head.

Professional accountants, as a first and preliminary measure, offer to the nation, those standards and criteria that define true professionalism. Professionals are known by the key attributes of discipline, competence and integrity. These qualities stand out true professionalism from mere pedestrianism. The first, Competence is the hallmark of professionalism. It is borne out by vast body of knowledge and skills acquired from a lifetime of study and practice. The second attribute is Discipline - the price tag of professionalism. Discipline involves mastery of self and elements of time management, hard work, persistence, honesty and responsibility. The third attribute is Integrity - the ultimate test of professionalism. Professionals are persons committed to standards of integrity and performance that cannot be altered to suit people’s tastes or what they are willing to pay for - men who stay true to what they were called to do, stubbornly refusing to do the easy work that the age asks of them (Peterson, 1996). And the professional accountant presents this role-definition as a guide to Nigerian leaders.

Furthermore, it is difficult for any act of fraud to be perpetrated, from start to finish, without the active connivance of an accountant. By their nature, accountants are custodians of the nation’s commonwealth. Whether they function as Treasurers or as recorders of the goings-on in the polity, they keep their hands on the pulse of the nation’s economic well-being. Stemming therefore, the tide of corruption, embezzlement and malfeasance in the polity is a charge on the ethical and moral fibre of the accountant.

The specific issue germane to our present discourse, is the role of professional accountants in a fragile democracy, particularly in the context of the soon-coming 2011 elections. We may set out the challenge as follows:

*Continued from page 9



• To raise reporting formats that will redefine standards of transparency and accountability in the polity;

• To strengthen the Rule of Law by monitoring and reporting on all infractions of the law - whether fiscal or otherwise. By this token, the institutions and mechanisms that drive due process and rule of law, should be well oiled and maintained;

• To provide a reporting system that enables constituents evaluate current promises of politicians in the light of their past promises. In other words, how have our representatives performed? How have they justified their previous sojourn in government?

• To raise indices of good governance and efficient performance that will enable us score our representatives;

• To provide the audit skills - forensic or otherwise - to enable the polity uncover the financial sleaze and dealings of our leaders, as a contribution to the fight against corruption;

• To apply audit and investigative techniques in ridding the voters register of ghosts and such impositions.

One major area of service for professional accountants, is in the monitoring and evaluation of programmes in the public domain. How have government programmes and activities impacted on the lives of the citizenry? Monitoring refers to the activities involved in recording progress in programme implementation. It is the continuous or periodic review of programme/project implementation by management to assess delivery, identify difficulties, ascertain problem areas, and recommend remedial action. It is thus primarily concerned with the delivery process, ensuring that inputs, through activities, are transformed into outputs, and analysing their quantity and quality. The process involves regular observation and surveillance in order to record achievements, failures and constraints in the implementation of the programme (National Planning Commission, 1997). Evaluation on the other hand, is concerned with determining the effectiveness and impact of the programme outputs. Evaluation is taken, not necessarily at the end of the programme life, but as an ongoing review as the programme progresses. It is generally undertaken during the implementation of the programmes, at the time of completion of the programme, and some time after the completion of the programme.

How open and transparent are elected public officers? How accountable have they been in the discharge of their brief? Accountability can be defined as being answerable and responsible to a party as a means of ensuring that the purpose and objectives of certain programmes and

activities are achieved. It requires that accurate records are kept, proper explanations are given for resources received for a purpose, and the uses thereof for the purpose of achieving the stated objectives. There are different kinds of accountability: * Financial accountability: This is concerned with accounting systems, internal controls and audited financial statements. It addresses the functioning of the public financial management system, preparation of public accounting reports, establishment of code for public sector performance, emphasis on compliance with key documents of public practice - for example, the Constitution, the Finance Act, Audit Act, Financial Regulations/Memoranda/Instructions - and attuned to the reports of external bodies like the Office of the Auditor-General, and the Public Accounts Committee;* Results accountability: This aspect is concerned with the degree to which agreed proposals have in fact been achieved. It weighs programme performance against the goals set out ab initio, and adjudges it successful if set targets have been attained or surpassed;* Administrative accountability arises where public agencies are hierarchically organized. This ensures regular and daily accountability by a subordinate to his superior, and operative to his supervisor. Also the government department/ministry accounts as a body to the authority from which it derived its existence. The civil service regularly accounts to the political heads, and both the bureaucracy and executive are held accountable to the legislature, the public and in constitutional matters to the Judiciary. In some countries, administrative courts, ombudsman or Public Complaints Commissions are devices to check administrative abuses and injustices by public servants against individuals and the public.* Political accountability is less susceptible to quantitative measurement. It is measured by four main considerations:* Are the representatives of the people, truly representing the interests of those who elected them?* Does the democratic practice truly give effect to the wishes of the majority?* Does the political process emphasize due process and faithfulness to statutes and necessary laws of the land?* Are the actions of the legislature, the judiciary and the executive such as to maintain the trust and confidence on which public office is anchored?

In sum, the functions of accounting define the role that the professional accountant is expected to fulfil in the nation’s nascent democracy. The professional accountant is expected to report, to proffer honest, sincere and objective counsel, to criticize constructively, to offer alternative options to plans and purposes of the different

*Continued on page 16


(L-r) ANAN 2nd Vice-President, Alhaji Sakirudeen T. Labode, 1st Vice-President, Hajia Maryam Ladi Ibrahim and ANAN President, Chief (Mrs) Iyamide F. Gafar reciting the National Pledge before the

beginning of the Orientation and Induction programme of new members at the Mandatory Continuing Professional

Development (MCPD) programme held in Enugu, Enugu State recently.

*(Fifth from the left) His Royal Highness Dr. J.U. Nnaji Eze

Odezuluigbo III of Nike, Enugu State in a group photograph with ANAN

President, Chief (Mrs) Iyamide F. Gafar and some Council Members after the courtesy call on the royal father at his

palace in Enugu.

*New inductees of ANAN take their oath of allegiance at the

Orientation and Induction held in Enugu, recently.


(L-r) ANAN Council Member, Professor Mohammad A. Mainoma, ANAN

Registrar/Chief Executive, Chief Terkaa I. Gemade, 1st Vice-President, Hajia

Maryam L. Ibrahim, Chairman, Extensible Business Reporting Language (XBRL)

Board, Mr. Mike Willis; ANAN President, Chief (Mrs) Iyamide F. Gafar, a director of

XBRL Services, IFRS Foundation, Mr. Olivier Servair and ANAN treasurer, Mr.

Anthony C. Nzom at the World Congress in Malaysia.

*(L-r) ANAN Registrar/Chief Executive, Chief Terkaa Iyorhyer

Gemade, ANAN President, Chief (Mrs) Iyamide F. Gafar, President of NIA,

Dr. Christine Leetham, ANAN 1st Vice-President, Hajia Maryam Ladi Ibrahim

and Chief Tunde Gafar in a group photographs at their visit to their

Australian counterparts.

*ANAN President, Chief (Mrs) Iyamide F. Gafar presenting gift items to the Vice-Chancellor of Taraba University, Prof. Ahmed

Usman during her visit with her team to the University.



arms of government, and to define the values that will drive the process. It was David Alexander who said: “As a profession, if we put all our trust in figures, we do so at our peril”. The role of the accountant must stretch beyond mere figures. Accountants should understand values and play a dominant role in the value re-orientation drive. They must bring their vast knowledge to play in the area of monitoring, evaluation and control. And they must proffer their ideas in the vital area of transparency and accountability.

iv ConclusionIt was Eisenhower (1961) who said:As we peer into society’s future, we - you and I, and our government - must avoid the impulse to live only for today, plundering for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

Strong, determined and purposeful action is required for 2011, if our nation will not go the way of the humongous republics of Eastern Europe. A nation that cannot feed the many citizens who are poor, will not be able to protect the few who are rich. A strong and resilient society is measured by the compassion, care and love with which it treats those members of the society that are weak and infirm. Unless we retrace our steps today, our anniversary celebrations will be a sham, “our boasted liberty, an unholy licence; our national greatness, swelling vanity; our sounds of rejoicing, empty and heartless; our shouts of liberty and equality, hollow mockery; our prayers and hymns, our sermons and thanksgivings, with all the religious parade and solemnity, mere bombast, fraud, deception, impiety, and hypocrisy - a thin veil to cover up crimes which would disgrace us as a nation of savages” (adapted from Douglas, 1852).

The task for us all - accountants, politicians, civil servants, businessmen and women, and the general public - is awesome. Fifty years ago, our nation’s birth as an independent nation, was a milestone in the long quest for black emancipation, freedom, and restoration of human dignity. But the bold and brilliant dream which excited the founders of this nation, still awaits its consummation. “I have no new dream to set forth today, but rather urge a fresh faith in the old dream. ... Let our recent mistakes bring a resurgent commitment to the basic principles of our nation... Let us create together a new national spirit of unity and trust” (Carter, 1977).

ReferencesCarter J. E. (1977), Inaugural Address, January 20,

Published in The World’s Greatest Speeches, Vijaya Kumar (ed), Aba, Mindex Pub.

Douglass F. (1852), Fourth of July Celebrations, Published in The World’s Greatest Speeches, Vijaya Kumar (ed), Aba, Mindex Pub.

Egbemode F. (2010), “I Want to be a Lawmaker”, Sunday Sun, December 5.

Eisenhower D. D. (1961), Farewell Speech, January 17, Published in, The World’s Greatest Speeches, Vijaya Kumar (ed), Aba, Mindex Pub.

Ekpu R. (2010), “Leadership: The Flock or the Fleece”, Newswatch, October 4.

Herbert W. E. (2008), “Critical Perspectives of Mr. President’s 7-Point Agenda” in Agenda 20 2020: Redesigning Nigeria’s Future, B. C. Osisioma (ed), Lagos, ANAN.

King Jr. M. L. (1963), Quoted in A Testament of Hope: Words and Speeches of Martin Luther King Jr. (2008), by Coretta Scott King et al, Benin, Self Improvement Pub.

Nixon R. (1969), Inaugural Address, January 20, Published in The World’s Greatest Speeches, Compiled by Vijaya Kumar (ed), Aba, Mindex Pub.

Obi I. (2009), Index of Governance, October 7.Osisioma B. C. (2010), “2011 - A Fresh Start for

rdNigeria”, Presented at 53 National Conference of Broadcasting Organizations of Nigeria, Awka, September 16.

Osisioma B. C. (2010), “Electoral Reforms and Good Governance: Path to a New Dawn”, Presented at Inauguration of Governor of Anambra State, Awka, March 16.

Peterson E. H. (1996), Working the Angles: The Shape of Pastoral Integrity, Grand Rapids, Eerdmans Pub. Co.

Shehu A. Y. (2006), “Corruption, Rule of Law and Sustainable development”, Nigerian Journal of Economic and Financial Crimes, Vol. 1, No. 1, April-June.

UNDP (2009), Human Development Report Nigeria 2008-2009: Achieving Growth With Equity, Abuja.

Williams A. (2010), “The Pendulum of National Failure: Towards State-Survival in Nigeria”, May Day Silver Knights Annual Lecture, Premier Hotel, Ibadan (Published in The Nation, p. 48)

*Continued from page 13

*The author is a Professor of Accountancy and Member of the Governing Council of Nnamdi Azikwe University, Awka, Anambra State.


THE ROLE OF EXTERNAL AUDITORS

The Role Of External Auditors In Corporate Governance In Nigeria

Anichebe Alphonsus S.

IntroductionIn the socio-economic environment that we are facing today, the corporate entities are assuming an increasing role in different spheres of economic activity. Thus the management of these companies which are the major partners of economic development of a nation, has become a matter of concern as only good governance of these companies can result in rapid economic development that augments national wealth and prosperity of the society as a whole.

Corporate governance is concerned with ways in which all parties interested in the well being of the firm ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interest of the stakeholders (Sanda, 2005). It is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Such measures are necessitated by the separation of ownership from management which is an increasingly vital feature of the modern firm.

Auditors are engaged as agents under contract but they are expected to be independent of the agents who manage the operations of the business. The primary purpose of audited accounts in this context is one of accountability and audits help to reinforce trust and promote stability. (ICAEW, 2005).

For the auditors’ role in corporate governance to be effective, they must be seen to be truly independent of the organisation on whose accounts they report. However, this is not always the case as the agency theory and the theory of economic self-interest would suggest.

AbstractThe role of auditors in corporate governance has come under increasing public scrutiny following the numerous corporate collapses and related frauds, which occurred in Nigeria and around the world. This paper examines the extent to which the auditing profession has contributed to the growth of corporate governance culture in Nigeria and concludes that this role has been hindered by the failure of auditor independence arising from factors such as, poor regulation and supervision of the profession, provision of non-audit services as well as the auditor’s personal interest in the client. It recommends the establishment of an independent oversight body, prohibition of non-audit services, strengthening of professional education and training among others.

Auditors’ independence from their clients is compromised in the following cases; (i) Poor regulation and supervision of the audit

profession(ii) Provision of non-audit services to the client(iii) Auditor’s personal interest in the client.

This paper examines the extent to which the auditing profession has contributed to the growth of the corporate governance culture in Nigeria. This paper is organised as follows: Following the introduction is the literature in Section II while Section III concludes:

Review Of Related Literature

Agency TheoryA simple agency model suggests that as a result of information asymmetries and self interest, principals lack reasons to trust their agents and will seek to resolve these concerns by putting in place mechanisms to align the interests of the agents with principals and to reduce the scope for information asymmetries and opportunistic behaviours.

Auditors act as agents to principals when performing an audit and this relationship therefore brings with it similar concerns with regard to trust and confidence as the director-shareholder relationship, prompting questions about who is auditing the auditor (ICAEW, 2005). Like directors, auditors will have their own interests and motives to consider.

The Economic Theory Of Auditor IndependenceThis theory suggests that auditors trade off the benefits of



compromising their independence against the potential loss of reputation and litigation costs that might result from such a compromise (Watts and Zimmerman, 1981; De Angelo, 1981). Falk et al (1999), find in an experiment carried out with students, that the biggest threat to independence is the risk of losing a client. This is consistent with Beattie et al (1999), who found that the two most frequently cited factors, which are perceived to undermine auditors’ independence, are; where partners income depends on the retention of a specific client and where ten percent or more of the firm’s total revenues come from one client.

Poor regulation and supervision of the audit profession Regulation represents attempts by the state to alter the administrative and legal framework that governs market transactions (Spuiber, 1989).

In a collective system, the role of government is to create an environment for sustained and orderly economic growth through fiscal, monetary and regulatory policies (Simon, 1981).

Government’s main objective in regulating the global financial system is to create financial and economic stability (Page, 1987).

Government should therefore ensure that the provision of auditing services, as one of the public services provided, should be rendered in the most appropriate, economic, efficient and effective way.

Mitnick (1980) further mentions that regulation should be exercised by an entity, which is not involved in the activities to be regulated.

The auditing profession in Nigeria according to World Bank (2004) suffers from the following lapses;- There is no independent oversight body responsible

for the registration of auditors, licensing requirements and disciplinary matters. The existing professional bodies act as both the examining body and licensing authority for their members engaged in public auditing practice.

- The disciplinary mechanisms for auditors may be inadequate which may have undermined the independence of auditors in Nigeria. In some regulated industries like the Insurance and Securities markets, the appropriate agencies have no involvement in the auditors’ appointment as well as in the removal or resignation of auditors.

- Furthermore, proper mechanism for the adoption and enforcement of auditing standards in Nigeria is lacking.

In conclusion the report found compliance to be weak and enforcement mechanisms inadequate.

It is clear that in cases where there is a public interest, as in the case of the auditing profession, self-regulation with little or no interference from government and no representation or financing from various interested parties is inappropriate (Odendaal and Jager, 2005).

What we have in the Nigerian case is a situation where the accountancy profession is acting as a watchdog over its own members’ affairs and as a result is more prone to regulatory capture.

The provision of non-audit servicesWhen performing an audit, it is of great importance to the auditor to have extensive knowledge of the client’s company. This, combined with the professional skills that an auditor must possess, makes the auditor a perfect consultant for the client. Such services, not directly related to the audit, are referred to as non – audit services. According to Kinney et al (2004), the provision of non-audit services can lead to a better audit. When carrying out the non-audit services, the auditor will gain more familiarity with, for example, the client’s computer and internal controls systems and through that the quality and the accuracy of the audit could be improved.

There are, however, problems related to the provision of non-audit services. Many believe that providing non-audit services to an audit client could impair the quality of the audit (Firth, 2002). This is mainly a question of lack of independence towards the audit clients. When providing non-audit services, the auditors often gain a close relationship with management that can cause a situation where the auditors take sides with the client instead of following regulations (Soltani, 2004). There is also a risk that the increased income that is due to the provision of both audit and non-audit services could add to the auditing firm’s dependence on the client (Firth 2002). When facing the risk of losing both the audit and the non-audit services of a client, it is believed that an auditor is less willing to criticize a client’s financial statements than if the auditor only provides one of the services (Sharma & Sandhu, 2001). According to Soltani (2004), the prohibition of non-audit services to an audit client is based on three principles that are considered to be determinants for the independence of the audit profession- An auditor cannot function in the role of management- An auditor cannot audit his or her own work- An auditor cannot serve in an advocacy role for his or her client.Crockett, Harris Mishkin and White (2003) explain how



the growing importance of income from non-audit services to accounting firms may have helped dishonest managers to persuade outside auditors to go along with questionable accounting decisions.

Titard (1971) and Pany and Reckers (1984) report that financial statement users were highly concerned about independence impairment when auditors provided consulting services to audit clients, but they were less concerned when a separate division of the audit firms offered such services.

However, Schockey (1981) found that financial statement users were concerned about auditor independence in both scenarios just described. Simunic (1984) notes that the involvement of the auditor in Management advisory services reduces the probability of truthful audit reporting. A survey of loan officers and financial analysts indicates that auditor provided consulting services do not impact their perceptions of auditor independence (Pany and Reckers 1988). In an experimental markets study, Schatzberg et al, (1996) indicate that potential economic rents in the form of non-audit fees can impair auditor independence if the benefits of misrepresenting audit findings exceed the costs.

In Nigeria, auditors accept all services (expect those for which the auditor has no expertise) as long as there are separate engagement letters. The existing independence rules are clearly breached. The same auditor is allowed to prepare and audit the financial statement due to lack of qualified accountants (World Bank, 2004).

There are provisions in both the Companies and Allied Matters Act (1990) and the ethical codes of the various professional bodies of accountancy which seek to prohibit such non-audit services, but as noted earlier, these provisions are hardly complied with or enforced.

Auditors Personal Interest in the ClientThese include: auditors’ emotional, financial or other personal interests. Auditors may favour, consciously or subconsciously, their self-interest over their interest in performing the financial statements audit.

These could arise, under the following circumstances- Loans to or from client- Benefits by way of goods or services or hospitality

from a client- Beneficial interest in shares and other investments- Senior audit employee joining client - Other personal or family relationships with the client.

The main features of independence are therefore that the

auditor is impartial, has no personal interest in the client company and is not susceptible to pressure or influence (Firth, 2002). Mautz and Sharaf (1961) claim that freedom from bias and prejudice, obvious as well as hidden is crucial to the auditor’s independence. Both Howard (1982) and Abadi (2005) are of the view that for the auditors to preserve their independence they should not have any beneficial interest in shares and other investment in the client. This is also in line with the view of Millichamp (1990) that auditors should neither give to nor receive loans from the client. Akpomi and Amesi (2009) are also of the view that problems could arise with work required by blood relations or personal friends.

Auditor independence from their clients is compromised by any relationship that builds a common identity between them. Psychological research on the “minimal group paradigm” has demonstrated how easy it is to establish a group identity that leads people to favour fellow in-group members (Tajifel & Turner, 1986). Thompson (1995) has shown that even the most superficial affiliation with a partisan leads people to interpret ambiguous information in ways that are consistent with the partisan’s interests. Indeed, several studies have found that auditor independence and the quality of auditing decisions deteriorate over time as the auditor-client relationship lengthens; (Dies & Giroux, 1992; Mautz & Sharaf, 1961).

In addition, there can hardly be a more effective means of establishing a common identity between auditor and client than rotating personnel between them. Obviously, independence is compromised when an auditor hopes to develop job opportunities with the audited firm.

In order to maintain independence, audit firm should review on an annual basis, every client to determine if it is proper to accept or continue an audit engagement bearing in mind apparent threats to audit objectivity.

ConclusionGood financial reporting is an important building block of corporate governance. The information provided to the shareholders has to be optimal in terms of cost and benefits. Auditing standards should lead towards better accountability, authenticity and investor protection. Over and above there should be an independent audit. Effective corporate governance arises out of responsible and simultaneous vigilant actions by the managers, the Board of Directors, shareholders and the auditors. The auditor should act as the monitor to the whole system to ensure adherence to ethical values, which is the backbone of the corporate governance.The auditing profession therefore has a definite role to



play in enthroning a strong corporate governance culture in the Nigeria corporate environment.

This role however has been hindered by failure of auditor independence, arising from factors such as poor regulation and supervision of the auditing profession, provision of management advisory services and auditor’s personal interest.i. The establishment of an independent oversight body:This body would oversee the audit of public companies that are subject to the securities laws and related matters, in order to protect the interest of investors and further the public interest in the preparation of informative, accurate and independent audit reports for companies, the securities of which are sold to, and held by and for public investors.

The duties of this body shall include - register all auditing firms - establish or adopt or both by rule, auditing, quality

control, ethics, independence and other standards relating to the preparation of audit reports.

- Conduct inspections of registered auditing firms- Conduct investigations and disciplinary

proceedings, and impose appropriate sanctions, where justified, upon registered audit firms and associated persons of such firms.

- Perform such other duties or functions, which are necessary for promoting high professional standards, and improve the quality of audit services, offered by registered audit firms and associated persons thereof.

- Enforce compliance with relevant laws, rules and professional standards and the securities laws relating to the preparation and issuance of audit reports.

ii. Prohibition of non-audit services including:- Bookkeeping or other services related to the

accounting records or financial statements of the audit client.

- Financial information systems design and implementation

- Internal audit outsourcing services- Management functions or human resources- Secretarial and taxation services, etciii. Strengthen professional education and training: The following steps should be taken by the various professional accountancy bodies to address weaknesses in professional education and training arrangements.- Review of arrangements for enforcing compliance

with CPE requirements as well as align their CPE requirements with the IFAC guidelines.

- Further improve on the standard of their qualifying examinations to take care of observed weaknesses in professional education over the last two decades. Moreover the professional qualifying examinations should include a paper on business ethics.

iv. Enhance audit quality control: Quality control policies and procedures should be implemented at both the level of the audit firm and on individual audits. The accounting firm should establish a system of quality control designed to provide it with reasonable assurance that the accounting firm and its personnel comply with regulatory and legal requirements, the Code of Ethics for professional accountancy bodies, standards on auditing, etc, and that reports issued by the accounting firm and engagement partners are appropriate in the circumstances.

v. Strengthen capacity of the regulatory bodies and review adequacy of statutory enforcement provisions: take necessary steps to strengthen capacity of the regulators (including Registrar of Companies at the Corporate Affairs Commission, Securities and Exchange Commission, National Insurance Commission, and the Central Bank of Nigeria) that enables them to effectively deal with accounting and financial reporting practices of the regulated entities. Revise legislations to provide for effective sanctions and penalties, and further clarify the roles of the Nigerian Stock Exchange and Securities and Exchange Commission in monitoring and enforcement.

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Chakraborthy, P. (2004). Corporate Governance: the changing role of auditors. Journal of the Institute of chartered accountants of India. September, 269 – 272.

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Geneva: International center for Monetary and Banking studies and the National center of competence in Research.

De Angelo L.E. (1981). Auditor independence, low-balling, and disclosure regulation. Journal of Accounting and Economics 3:113 – 127

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Firth, M. (2002). “Auditor provided consultancy services and their association with audit fees and audit opinions” Journal of Business Finance and Accounting vol 29, nos 5 and 6: 661 – 693

ICAEW (2005). Agency Theory and the role of audit. UK. Institute of Chartered Accountants in England and Wales.

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Mitnick, M. (1980). The political Economy of Regulation. New York: Columbia University.

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ndgroup relations (2 Ed.): 7-24 Chicago: Nelson – Hall.

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Watts, R. and Zimmerman, J., (1981), The markets for independence and independent auditors. Working Paper, University of Rochester.

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*The author is a lecturer, Department of Accountancy, Anambra State University, Igbariam Campus, Nigeria.


STUDY OF BANKS AND NON-BANKS

Introduction Profit maximization has historically been assigned as an objective criterion of business in a free market economy. Hence, the level of profitability is often used as a measure of a firm’s efficiency. Profit maximization implies that the firm either produces a maximum output for a given amount of input or uses a minimum input in producing a given output. The efficiency logic of profit maximisation has its roots in transaction costs economy. Transaction costs economy also overcomes the narrow confines/interests of profit maximization as the desideration of stakeholders’ claims in general, in the modern corporation. Economising on transactions provides a broader perspective for assessing firm’s efficiency than profit maximisation, since it is commonly inputed to both for-profit and non-for-profit organisations. Besides, every organisation has material and financial interest in cost minimisation and/or output maximization.

A fundamental assumption of equity investment is the potential it affords to earn returns. The returns come in the form of dividends and/or capital gains, arising from appreciation of value of their stock. Equity returns, generally, are reflections of the residual profitability of companies. Ceteris paribus, an equity investor would prefer to invest in or hold on to a stock that promises higher returns to another stock with lower returns.

In the past more than five years, equity investors in the Nigerian Stock Exchange had shown marked preference for shares of banks. This is inspite of the series of bank failures in which investors sustained huge losses. This supposition that bank shares offer more return is

A Comparative Study Of The Performance Of Banks And Non-Banks Listed On The Nigerian Stock Exchange

Ugochukwu C. Nzewi

AbstractThis study compared the performance of banks with non-banks listed on the Nigerian Stock Exchange, to determine the economic justification if any for the observed preference for banks’ shares by Nigerian investors. The study also assessed the performance of the individual banks listed on the Exchange in terms of significant differences, if any, to justify the preference for shares of certain banks. Data were obtained from the yearly Factbook of the Nigerian Stock Exchange in which the five-year financial summary of each of the listed banks and non banks is published. The Kruskal-Wallis one-way ANOVA by rank and t-test were used to determine significant differences in the ROE on the equity of the Companies. The results show that there are significant differences in the profitability of banks and non-banks listed on the Exchange. The results also show that there are significant differences in the profitability of individual banks listed on the Exchange. These findings justify the observed investors’ preference for banks’ shares, and, in particular, certain banks’ shares.

axiomatic to a claim that banks are more profitable than the other non-bank companies listed on the Exchange. And even among the banks, there is marked preference for shares of certain banks suggesting that some banks are more profitable than others. But these suppositions have not been subjected to statistical test.

Objective of the StudyThe objective of this study is two-fold; (1) to assess the returns available to equity investors in the shares listed on the Nigerian Stock Exchange so as to determine whether there is economic justification for the observed preference for shares of banking companies and (2) to determine whether there are significant differences in the performance of individual banks to justify the observed preference for shares of certain banks.Specifically, the study will;1. Compare the profitability of the banking companies

with that of the Brewery companies to see if there is significant difference in favour of the banks.

2. Compare the profitability of banking companies with that of the companies in the Food/Beverages and Tobacco group to see if there is significant difference in favour of the banks.

3. Appraise the profitability of the individual banks listed on the Exchange with a view to determining whether there is significant difference in their performance.

The following hypotheses will be tested:Hypothesis 1: There is no significant difference between the profitability of banks and non-banks (breweries, food/beverages and tobacco companies) listed on the Nigerian Stock Exchange.



Hypothesis 2: There is no significant difference in profitability among the individual banks listed on the Exchange.Scope of the StudyThe scope of the study is limited to the appraisal of the profitability of the companies listed on the Nigerian Stock Exchange in the period 2004 – 2008.

Conceptual IssuesThe problem with accounting profit is that it ignores implicit returns. The economist’s definition of profit is the difference between revenue and the opportunity cost of all the resources used. This definition includes implicit return as costs, and because profit emerges as a surplus, it is argued that it should not persist in an industry in which entry is easy. As Schenk (2010) put it; … whenever a surplus exists, new firm should flow into an industry, bidding up the price of resources and bidding down the price of output until profit in the economic definition is eliminated. Profit should not exist in long-run equilibrium…. Profit does not exist in the real world and there are several explanations that economists have for it. Some economists simply consider it as an indication that the economic system is in perpetual disequilibrium … others see profit as an indication that forces of competition may not be strong and that some industry barriers to entry exist. Still other economists have argued that profit is a special sort of implicit r e t u r n , a r e t u r n f o r b e a r i n g risk.(htt.//ingrimayne.com/econ)

Income and profit can be used interchangeably.The economist’s view is that profit is the maximum value which a person could consume during a period and still be well off at the end of the period as at the beginning. The economist’s concept of income is traced to Adam Smith’s definition of income as “increase in wealth”.Over the years, most economists, both classical and neo-classical have continued to re-examine the concept of income and this has provided a new outlook to the concept (Sani, 2010). For practical business purposes, the economist’s profit can be summarized as total revenue minus total cost including implicit cost. This idea introduces what the economist refers to as normal profit. Economists have argued that normal profit (return) is necessary to keep a firm in business, otherwise the owners would invest their resources elsewhere. Consequently they conclude that normal profit should take into account the entrepreneur’s wages, approximately equivalent to what he would earn as a

salaried employees and interest on capital at the market rate. They further argue that profit may fluctuate steadily about the normal income or they may vary between wide extremes. Interestingly, therefore, the difference between accounting profit and economic profit is the implicit cost. The implicit profit includes the normal profit and the monetary income that the firm sacrifices when it uses owned resources instead of supplying them to the market. In this way, economic profit can be re-stated as accounting profit less implicit cost. Profit determination both from the accountant and economist’s perspectives have always centered on these concept (Sani, 2010).

Much as it can be argued that profit may not be the sole aim of being in business, it remains the means for continued survival of any commercial entity. In this regard Akenkanye (1986) said that profit contributes to the growth of business capital and that the strength of a company is usually measured by its capital base that serves as a cushion for unforeseen losses. Again if a commercial enterprise is to negotiate a facility from a financial institution, the profit records and capital position of the enterprise must be sound and this leads to trust. In summary, good track record of profit sustains public confidence which in turn attracts patronage necessary for survival in any business (Irekponor 2010).

Profit MaximizationIn economics, profit maximization is the process by which a firm determines the price and output level that returns the g r e a t e s t p r o f i t ( h t t p : / / w w w . n o w s e l l .com/marketingguide)The ultimate purpose of commercial enterprise is to earn a profit. The profit motive notion is closely related to the concept of self interest. Adam Smith originally described the working of a free market not in terms of profit motive but as a by-product of individual self interest. Under this philosophy, the profit motive is axiomatic in that the only way a firm can further the interest of its shareholders is to earn profit. It is by this logic that economists generally hold that under conditions of free competition, business men pursuing their self interest also serve the interest of the society and that when individual firms pursue the interest of maximizing profit, society’s resources are efficiently utilized. Hence the behaviour of a firm is analyzed in forms of profit maximization (Pandey, 2005). But while maximization of profit is regarded as the proper objective of the firm, it is not as inclusive a goal as that of maximizing shareholders’ value (Van-Horne, 2002).

The underlying logic of profit maximization is efficiency, and the assumption is that profit maximization causes the efficient allocation of resources under a competitive market condition. Critics on the other hand point out that

24



profit maximization allows no room for the interest of customers, the employee, or society and the environment, unless these interests happen to align with what the profit motive dictates.

Pandey (2005) argued that profit maximization cannot in the face of imperfect modern markets be a legitimate objective of the firm.In his words:

… that profit maximization as a business th

objective developed in the early 19 century when the characteristic features of business structure were self financing, private property, and single entrepreneurship. The only aim of the single owner then was to entrench his or her individual wealth and personal power which could easily be satisfied by the profit maximization objectives. The modern business environment is characterized by limited liability, and a divorce between management and ownership. Shareholders and lenders today finance the business firm but it is controlled and directed by professional management … other important stakeholders of the firm are customers, employees, government and society. In practice, the objectives of these stakeholders or constituents of a firm differ and conflict with each other.

It is contended that profit maximization in a market economy will tend to produce goods and services that are wasteful and unnecessary from the society’s point of views and that it might lead to inequality in income and wealth distribution. It is further contended that it fails to serve as an operational criterion for maximizing the owners economic welfare and to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency (Pandy, 2005).

Above all, profit maximization is not a very precise objective. It is ambiguous because it fails to state exactly which profit is referred to. If it is profit for the year, then we should note that actions such as deferring maintenance, letting inventions run down, and taking other short-term cost cutting measures will tend to increase profit now, but these activities are not necessary desirable. The goal of maximizing profit could refer to some sort of long-run or “average” profits, but it is still unclear exactly what it means (Ross et. al, 2002). On this Nzewi (2007) argued:

… which measure of profit are we really talking about? Is it total corporate profit or earnings per share? The distinction is important because total corporate profit could be maximized, yet earnings available to shareholders will not be similarly affected. Again, total corporate profit could

increase alongside an increase in the number of shares. In that case, earnings per share will not be affected. Then, will maximizing earnings per share maximize shareholders welfare? Here again, the question will be asked as to the timing of the earnings per share.

For one thing, total profits are not as important as earnings per share. But even maximizing earnings per share is not fully appropriate because it does not take into account the timing or duration of expected returns. Besides, earnings per share are based on accounting profits but many feel that operating cash flows are what matter most. In addition the objective of maximizing earnings per share suffers the pitfall that it does not consider the risk or uncertainty of the prospective earnings stream. This is very important because some projects are far more risky than others. To these will be added the fact that a firm may be more or less risky depending on the amount of debt in relation to equity in its capital structure (Van-Horne, 2002). Perhaps it is in consideration of these factors that firms interested in maximizing shareholders’ financial welfare seek to maximize the value of the firm and in particular, the value of the firms stock. This is because the market price of a firm’s stock represents the value the market participants place on the firm. The logic is that the price of the stock reflects market valuation of the firm’s prospective earnings stream over time, the riskiness of the stream and the host of other factors (Mayo, 1991). Because the principles of maximization of shareholders’ wealth provides a rational guide for running a business, and for efficient allocation of resources in society, it is used as the assumed objective in considering how financial decision should be made. (Van Horne, 2002).

The assumptions that managers pursue the objective of maximizing the wealth of shareholders may not be as true as it is thought to be. In practice, managers do not go all out to pursue shareholders wealth maximization. They seem to perceive their role as reconciling conflicting objectives of stakeholders and this surely conflict with the objective of shareholders wealth maximization. For instance, managers have responsibility to the employees, to ensure their continued useful and profitable employment. They also have responsibility to the government and the society at large. In addition, the managers are equally interested in sales, in survival and in the personal satisfaction of themselves. But all said and done, managers cannot afford to neglect the pursuance of policies that will enhance the valuation of the firm because if the value of the stock falls, the firm will be less attractive and



consequently less marketable and these could expose the firm to the risk of unwanted take over bid (Mayo. 1991) .

Measures of Corporate ProfitabilityIn a dynamic economy, profit is regarded as a compensation or reward for the risk taken by the entrepreneur. Encyclopedia Americana apatly captured this by stating that profit is the lure that induces a business man to take risk in making improvement in any direction. And his reward for success is profit. Accountants have devoted energies on developing methods of measuring and reporting profit. One of the methods is through the income statement. The income statement measures how shareholders equity has increased or decreased as a result of business activities. It shows the sources of net income broadly classified as revenue (value coming from selling the product/service) and expenses (value going out in earning revenue).The net income equation thus becomes: Profit = Revenue less expenses (Sani, 2010).Gross profit is the difference between sales and the manufacturing cost of goods sold. There is profit after tax or net income which results from the impact of all factors on the firm’s earning. But since taxes are not controlled by management, profit before tax can also be computed to separate the influence of taxes. Operating profit on the other hand is the equivalent of earnings before interest and taxes.

In order to gain more insight about financial performance, accountants and financial analysts make use of ratios in making qualitative judgment about a firm’s financial performance. This is in realization that absolute profit figures convey more meaning when it is related to other relevant information. But a single ratio in itself would not indicate favourable or unfavourable condition. It has to be compared with some standards, which could be the past ratios calculated from past financial statement of the same firm or the ratios of some selected firms especially the most progressive and successful competitors. Comparison could also be made with the ratio for all the firms in the industry or with pro-forma ratio.

Different types of ratio can be calculated from the financial statement pertaining to a company. The ratios can be grouped into four broad categories namely leverage, liquidity, activity and profitability ratios. The leverage ratio reveals the extent to which a firm is financed with debt. This is important because if the firm is heavily dependent on borrowed funds, it will have implication on its riskiness. The liquidity ratio measures the ability of the firm to meet its maturing short term obligation, while activity ratio evaluates the efficiency with which the firm manages and utilizes the assets available to it in generating sales and profit.

Our focus however is on the profitability ratio of a firm. The reason is because even though the other ratios can reveal interesting things about the firm, the profitability ratios enable us to compare firms in one industry in order to determine the one that appears to be most profitable. In the main, the ratios revealhow efficiently the company is utilizing the resources available to it in generating profits that will eventually determine the values of the shares. The profitability ratios thus become a measure of financial efficiency or earnings efficiency (Nzewi; 2004).

There are basically two types of profitability ratios. One relates profit to sales (turnover) and the other relates profit to investment. Return in sales is useful in assessing performance of a firm in terms of its ability to generate profits from sales. It tells us the profit of the firm after deducting the cost of producing the goods (or services) sold. It indicates the efficiency of operators as well as how products are priced (Van-Horne, 2002). Return on investment also referred to as the earning power provides an index for determining how profitable a firm is in the use of its assets. If the assets have been efficiently managed, it will reflect in a high return on investment. Return on investment is therefore the ultimate test of business success. Return on equity on the other hand, measures the level of income that is due to equity holders. It is computed as a ratio of residual income to equity investment and is measured on an after tax basis because equity holders are not entitled to any return until the firm has paid its tax to government (Emekekwue, 2005). It is indeed an index of the return accruing to the equity investor for each naira of equity investment. Thus from the point of view of the equity investor, it is the most important ratio as it tells him in simple language what each naira of his investment is yielding. And since the earning of satisfactory return is the most desirable objective of a business firm, return on equity reflects the extent to which it is accomplished. It is of great concern to the present and future shareholders at the same time that it is of great concern to management which has the responsibility of maximizing the owner’s welfare. (Van-Horne 2005).

MethodologyDescriptive research specifies the nature of a given phenomenon. It focuses on the accurate description of the variables in the problem model, seeks new information about the subject of study and makes generalization of its findings about the population from which the subject had been selected (Nwachukwu 2007).



The population for the study is made up of all the two hundred and seven companies listed on the Nigerian Stock Exchange as published in the 2009 Factbook of the Nigerian Stock Exchange. The total market capitalization of the listed equities was N6.67 Trillion. The Exchange classified the companies into thirty four groups according to the nature of their business (Nigerian Stock Exchange, 2009) Judgmental sampling techniques was employed in selecting three groups, namely, Banking, Breweries and Food/Beverages and Tobacco as sample for the study. In judgmental or purposive sampling, the researcher uses his own judgment about the respondents to choose and pick only those that best meet the purpose of the study (Ikeagwu, 1998). The three groups selected account for 76.4 percent of the total market capitalization of all the listed equities as at the end of 2009 (Nigerian Stock Exchange, 2009).

Among the breweries, only two, namely Guinness Nigeria Plc and the Nigerian Breweries Plc adjudged alive and functioning were purposively selected for the study. The others, namely, Champion Breweries Plc, Golden Guinea Breweries Plc, International Breweries Plc, Jos International Breweries Plc and Premier Breweries Plc appear to be existing in name. They were excluded to avoid distortion of the real picture. With respect to the Food/Beverages and Tobacco group, the eight functional ones were used for the study. Others did not have their accounts published in the Factbook at all or had not operated for five years and therefore did not have comparative figures. Cadbury Nigeria Plc was purposively excluded because its accumulated reserves and shareholders fund were eroded following adjustments it had to make in its account because of its recent financial scandal.

Data for the study were obtained from the Factbook published by the Nigerian Stock Exchange on annual basis. Each year’s Factbook contains a five-year financial summary for each of the companies listed on the Exchange. The financial summary contains information on gross earnings, profit before tax, profit after tax among others. From the financial summaries, we extracted the profit after tax and shareholders fund and then computed the return on equity for all the companies under study. Other sources of secondary data include, text books, journals, seminar/conference papers and other publication’s that have bearing on the subject matter.

Data AnalysisKruskal-Wallis one-way analysis of variance by rank and t test were used to analyze the data. Kruskal-Wallis one-way analysis of variance by rank is a non-parametric tool that can be used to test the null

hypothesis that several groups means are equal. It is applicable where the assumptions of the F test are not satisfied and also when the assumptions are satisfied (Oyeka, 1996).The t test on the other hand is a parametric tool that can be used when testing the hypothesis that there is no difference between the means of two small samples (Gupta and Gupta, 2005).

In this study, we are interested in ascertaining whether there is significant difference between the profitability of banks and other non-banks listed on the Exchange over the period under study. And considering that our interest is on the equity investors, we use the return on equity as a measure of profitability because it is preferred to the return on investment as a measure of the shareholders financial welfare. It is true that return on investment is the ultimate test of business success. But return on equity is actually the index of what is accruing to the equity holder for each naira of his equity investment. And from the point of view of the investor, it is adjudged the most important ratio as it tells him in simple language what each naira of his equity investment is yielding(Nzewi, 2004). The return on equity of the companies over the period under study is shown in Appendix 1.

Testing of hypothesesHypothesis 1 is decomposed into two related tests because although it is a comparative assessment of banks and non-banks, the test is disaggregated for banks and breweries, on the one hand, and banks and food/beverages and tobacco, on the other hand. In effect, there is a dyad of tests: (a) one of no significant difference between the profitability of banks and breweries; and (b) one of no significant difference between the profitability of banks and food/beverages and tobacco, listed on the Nigerian Stock Exchange.This hypothesis is tested with the data in Table 2 in Appendix 2. Applying t test:t statistic: =3.43The details are shown in Appendix 2.At 5% significance level and 8 degrees of freedom, the critical table value is 1.86. Since t cal. 3.43 > tab. 1.86, we reject the null hypothesis and conclude that there is significant difference between the profitability of banking companies and brewery companies listed on the Nigerian Stock Exchange.

The test of no significant difference between the profitability of banks and Food/Beverage and Tobacco companies used the data in Table 3 (Appendix 3). With t statistic of 2.8, at 5% significance level and 8 degrees of freedom, the critical value is 1.86, and since this is >tab. 1.86, we reject the null hypothesis and conclude that there are significant differences between the profitability of banks and the companies in the Food/Beverages and Tobacco industry listed on the Nigerian Stock Exchange.

Test of no statistical difference among the profitability of banksThe hypothesis of no significant difference in the profitability of



the individual banks listed on the Nigerian Stock Exchange, was tested using the data in Table 1 and Table4 (Appendix 4). Applying Kruskal-Wallis one-way analysis of variance by rank yielded t-statistic 40.8, which at 5% significance level and 19 degrees of freedom, has critical chi-square value of H = 30.14. Since H = 40.87 > 30.14, we reject the null hypothesis and conclude that there are significance differences in the profitability of the individual banks listed on the Nigerian Stock Exchange.

Summary The results of the hypotheses show that there are significant differences in profitability between banks and non-banks (breweries). While the mean return on equity for the breweries is 36%, that of the banks is only 14%. As for the food/beverages and tobacco companies, the result also shows that there are significant differences in profitability between the banks and the former. Here again, the mean score of 19% is higher than 14% for the banks. This finding is supported by the assertion that profits made by Nigerian banks are still very low. As was credited to the Governor of the Central Bank of Nigeria:

Contrary to general opinion that banks make super profit, Soludo said that the reverse was the case, noting that returns on investment in banking industry were relatively small compared with the funds invested in the industry… a situation where a bank invested N100 billion and records a profit of just N10 billion was not good enough (http://www.nigerianmuse.com)

In addition to lower profitability, Nigerian banks have continued to be extremely risky even after the N620 billion bail-out of the sector in 2009. This was confirmed by a global rating agency, Standard & Poor when it stated that; The Nigerian banking system is very high risk. The rating we have for the banks are in the single B category, it is very low compared to most banks in the world … What Nigerian banks really used is to continue improving their risk management culture, particularly in developing strong asset quality measures (Ojeme 2010).

The implication of these findings is that the clamour for bank stock by Nigerian investors has no rational basis.Further findings revealed that there is significant difference in the profitability of the individual banks. The average of the means of the return on equity for all the banks is 14% over the study period. First Bank of Nigeria out-classed all the other banks with a mean of 23% of return on equity. It is followed by United Bank for Africa 22%.Union Bank, Oceanic Bank, GTB and Intercontinental Bank each recorded 18% average return. Other banks that recorded impressive returns are Eco bank 17%, Fidelity Bank 16% and Zenith Bank 15%. The banks with low average return on equity include Wema Bank 1%, Bank

PHB 2%, Sterling Bank 8%, First Inland Bank 11% and Access Bank 11%. The implication of this finding is that investors have rational basis for the observed preference for shares in certain banks.

ReferencesAkenkanya, F. (1986) The Elements of Banking in Nigeria, Lagos:

West African Publishers.Alili, H.I. and Anao, A.R. (1986) The Nigerian Stock Exchange in

Operation, Lagos: Jeromelaibo and Associates Ltd.Emekekwue, P. (2005) Corporate Financial Management, Kinshasa:

African Bureau of Educational Sciences.Gupta, C.B. and Gupta, V. (2004) An Introduction to Statistical

rdMethods, 23 Revised Edition, New Delhi: Vikas Publishing House PVT Ltd.

Ikeagwu, E. K. (1998) Groundwork of Research Methods and Procedures, Enugu: Institute of Development Studies.

Irekponor A. (2010) “Profitability of Commercial Enterprises in Nigeria”, Unpublished Ph.D Seminar Paper, Department of Accountancy, NnamdiAzikiwe University, Awka.

Mayo –BPP (1991) PE II Financial Management, Lagos: Mayo Associates Ltd and BPP Publishing Ltd.

Nigerian Stock Exchange (2009) Factbook, Lagos: Nigerian Stock Exchange.

Nwachukwu, C.O. (2007) Research Methods and Statistics for Management/Social Sciences, Applied Sciences and Education, Nsukka: IJAC Academic Press.

NzewiU.C. (2004) Financial and Investment Analysis, Onitsha: Noben Press Ltd.

———-. (2007) Financial Management, Onitsha: Noben Press Ltd.———-. (2009) “An Analysis of the Profitability of Commercial

Banks in the Post Consolidation Period in Nigeria” Journal of the Management Sciences, Vol.9, No.2.

Ojeme, S. (2010) Nigerian Banks Continue to be High Risk, The Punch (Lagos), p.2.

Oyeka, C.A. (1996) An Introduction to Applied Statistical Methods in the Sciences, Enugu: Nobern Avocation Publishing Company.

Pandey, I.M. (2005) Financial Management, Ninth Edition, New Delhi: Vikas Publishing House PVT Ltd.

Prasanna, C. (2008) Investment Analysis and Portfolio Management, rd3 Edition, New Delhi: Tata McGraw -Hill Company Ltd.

Profit Maximization (2009), http://www.nowsell.com/marketing guide. Accessed.

thRiahi-Belkaoui, A. (2002) Accounting Theory 4 Edition, London: Thomson Learning.

Ross, S.A., Westerfield, R.W. and Jordan, B.D. (2002) Fundamentals thof Corporate Finance, 6 Edition, Boston: McGraw-Hill.

Sani, P.M. (2010) “Profitability of Commercial Enterprises in Nigeria”, Unpublished M.Sc Seminar Paper, Department of Accountancy, NnamdiAzikiwe University Awka.

Schenk, R., (2009) Profit, http.//ingrimayne.com/econ/Make Profit. Accessed 30/12/09.

thVan-Horne, J.C. (2002), Financial Management Policy, 12 Edition, New Delhi: Prentice Hall of India.

*The author is a Chief Lecturer in Accountancy of the Federal Polytechnic, Oko, Anambra State.



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Appendix 2Table 2: Mean of the Return on Equity of

Banking and Brewery Companies (in percent)

Breweries Bank

2004 25 17.50

2005 23 12.65

2006 29.5 10.70

2007 39 13.1

2008 61.5 14.2

Source: Computed from the data in Table 1

Mean Scores = 13.63

Variance for Banks = 5.03

Mean for Breweries = 35.5

Variance for Breweries = 198.15t-Statistic = 3.43

Appendix 3Table 3: Mean of the Return on Equity of Banking

Companies and Companies listed in the Food/Beverages and Tobacco Group (in percent)

Food/Beverages and BankTobacco Companies

2004 13.1 17.50

2005 10.5 12.65

2006 22.9 10.70

2007 22.0 13.1

2008 22.8 14.2

Source: Computed from the data in Table 1

Mean Score for Banks = 13.63

Variance for Banks = 5.03

Mean Score for Food/Beverages and Tobacco = 18.26

Variance for Food/Beverages and Tobacco = 28.6

t-statistic = 2.8

Calculation of Kruskal-Walls H Statistic For Return on Equity of Banks listed on the Nigerian Stock Exchange Kruskal-Wallis Test Statistic: H = 40.8


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ICT INVESTMENTS AND NIGERIAN BANKS

IntroductionThe revolutionary potential of new ICTs lies in their capacities to instantaneously connect vast network of individuals and organizations across great geographic distances at very little cost. As such, ICTs have been key enablers of globalization, facilitating world wide flows of information, capital, ideas, people and products. They have transformed businesses, markets and organizations, revolutionized learning and knowledge sharing, empowered citizens and communities and created significant economic growth in many countries. ICTs have amplified brain power in much the same way

ththat the 19 Century industrial revolution amplified muscle power.

In recent years, with the coming of the digital age, there has been a growing awareness of the significance of Information and Communication Technologies. Financial institutions have understood that poor information and communication system have an impact on every aspect of its performance, from operational effectiveness to strategic management.

This paper begins by analyzing the trend in Information and Communication Technologies (ICTs). It then considers the role played by Information and Communication Technology in the overall performance of financial institutions. Finally, the paper discusses how ICT adoption has transformed the banking sector in terms of changes in structure, strategies, products, service delivery and performance as well as the problems associated with these changes.

Information And Communication Technology Investments And Financial Institutions Earnings: An Appraisal

Of Nigerian Commercial Banks

Adebayo Paul Adejola

AbstractThis study investigated Information and Communication investments in Nigerian Financial institutions with emphasis on their impact on earnings. Annual statements of accounts of eight (8) sampled banks were used to collect data on net income (the dependent variable) against the various investments of banks, which include ICT investments, investments in non-ICT labour and other investments for a period of ten years (1998 to 2007). Multiple regression analysis was used via SPSS 15 to test the hypothesis on whether or not ICT applications and investments significantly contribute to the net income of Nigerian financial institutions. The study revealed that ICT investments do not contribute significantly to the earnings of Nigerian banks. Based on the findings and conclusions, the paper recommended that Nigerian banks develop internal maintenance skills, invest more on latest ICT technologies that make use of biometrics as security solutions and make complimentary investments on business process reengineering.

Statement of the ProblemThe following problems are evident in the operations of Nigerian Banks:i. Inefficiency in payment and transactions processing

system.ii. Time spent on various banking transactions and

unnecessary use of material resources such as paper.iii. Frequent system breakdown without provision for

an alternative means of attending to customers during the period of breakdown.

iv. Ineffective business strategies requiring restructuring and reengineering programmes.

v. Time spent by customers queuing for the services in spite of the use of ICT tools such as Automated Teller Machine (ATM).

Looking at the array of these problems and the efforts by the introduction of technology to address these problems, it is only necessary to look at the investment in information and communication technology to see whether the investment in the sector is justified.

Statement of HypothesesThere have been claims by virtually all banks of acquiring state-of-the-art communication equipment as well as satellite technology to support their operations, with so doing, they hope to render customized services as well as improve their efficiencies. Sequel to the above, this paper wants to test that:

Hypothesis H : ICT applications and investments do 0

not contribute significantly to the profitability of Nigerian Banks.



Review of Related Literature During the last few decades, financial institutions and other organisations have made immense investments in Information and Communication Technology (ICT). The implications of these investments for productivity have been discussed in business and academic communities (Kayode, 2005). Besides, according to the role of ICT in Business process re-engineering, Business Process Re-engineering is essential for organizations to increase potential impact of ICT on overall performance of a company (Ahmad, 2008). This paper will provide an overview of the relevant literature relating to ICT and profitability, to direct theoretical contexts toward research hypothesis.

Information and Communication Technology ICT)Information and Communication Technology (ICT) is the set of activities that facilitate the capturing, storage, processing, transmission and display of information by electronic means. Information technology comprises of the hardware, software and human ware. Information and Communication Technology (ICT) is the set of activities that facilitate the capturing, storage, processing, transmission and display of information by electronic means (World Bank, 2002). ICTs include computers, Internet, communication networks, Telephone, Radio, Television, and Wireless Technologies like Global System of Mobile Communication (GSM).

ICT-based Services in the Nigerian Banking SectorSince the 1980s, following rapid advances in ICT, banking activities in Nigeria have had to depend heavily on the deployment of information technology. There are also clear indications that banks in Nigeria would thrive on web-base services in view of the overwhelming enthusiasm e-banking/internet banking is generating in Nigeria’s rapidly changing financial landscape.

Information and Communication Technology has assisted the way and manner in which banks carry out their operations to satisfying both their existing and potential customers. The products and services offered by banks in Nigeria include: ATM , Telephone Banking, Internet (On-Line) Banking, Electronic Mail (E-Mail), smart card.

Determinants of Bank ProfitabilityResearch on the determinants of bank profitability has focused on both the returns on bank assets and equity, and net interest rate margins. It has traditionally explored the impact on bank performance of bank-specific factors, such as risk, market power, and regulatory costs. More recently, research has focused on the impact of macroeconomic factors on bank performance.

In a study of United States banks for the period 1989–93, Angbazo (1997) finds that net interest margins reflect primarily credit and macroeconomic risk premia. In addition, there is evidence that net interest margins are positively related to core capital, non-interest bearing reserves, and management quality, but negatively related to liquidity risk.Saunders and Schumacher (2000) apply Cobb Douglas model to analyze the determinants of interest margins in six countries of the European Union and the US during the period 1988–95. They find that macroeconomic volatility and regulations have a significant impact on bank interest rate margins. Their results also suggest an important trade-off between ensuring bank solvency, as defined by high capital to asset ratios, and lowering the cost of financial services to consumers, as measured by low interest rate margins.Gelos (2006) studies the determinants of bank interest margins in Latin America using bank and country level data. He finds that spreads are large because of relatively high interest rates (which in the study is a proxy for high macroeconomic risk, including from inflation), less efficient banks, and higher reserve requirements.Akhavan (2006) studies the profitability behaviour of the south eastern European banking industry over the period 1998–02. The empirical results suggest that the enhancement of bank profitability in those countries requires new standards in risk management and operating efficiency, which, according to the evidence presented in the paper, crucially affect profits. A key result is that the effect of market concentration is positive, while the picture regarding macroeconomic variables is mixed.

Using accounting variables/ratios, as well as regressions, Al-Hashimi (2007) studies the determinants of bank net interest rate margins in 10 Sub – Sahara Africa countries. He finds that credit risk and operating inefficiencies (which signal market power) explain most of the variation in net interest margins across the region. Macroeconomic risk has only limited effects on net interest margins in the study.

Impact of ICT Investments on Corporate Performance Literature is replete on business value of ICT. The central issue is whether the tremendous amount of ICT capital invested has had any impact on the performance of the investing firms. However, in this review the intention is not to give details of prior work, rather, an attempt to discuss key findings as well as the major hurdles researchers and practitioners face in this area.Prior research on ICT in the banking services sector falls into one of the following two categories namely;



descriptive analyses of the use of ICT and the value it generates, and, measurement of the business value of ICT.

The first category is primarily based on case studies at the firm or industry level and offers useful insights about significant issues. While research in the second category i.e. research on the measurement of ICT on business value consists of studies on the impact of specific technologies and that of the overall use of ICT.

One of the studies in the first category is that conducted by Weill (1992). He classified ICT into three categories based on the management goals supported by the system. The study of the valve manufacturing sector identified significant productivity gains due to transactional ICT, but did not find any positive impacts for strategic or informational (ICT infrastructure) systems. Still another study by Brynjolfsson and Hitt (1993) used firm level data on three hundred and eighty (380) large firms for the period from 1987 to 1991 to measure the ICT impact. This study found that ICT had made a substantial and statistically significant contribution to firm output. Thus, so far, empirical findings reported in the literature on impact of ICT investment at firm or industry level, are mixed.

Another study was undertaken by Calderon (2001) on the impact of ICT and the performance of financial companies in South Korea. The study covers a period of three years (1991 – 1994) and examines the relationship between the effectiveness of ICT and financial growth of publicly traded financial companies in South Korea. It measures ICT effectiveness based on user satisfaction, support for internal business process and system reliability. It reveals that ICT effectiveness and financial growth of Korea banks are significantly associated statistically. This shows an insight into the thesis that enterprises with high business information intensity will show a positive association between effective ICT and economic performance.

In the second category, Steiner and Teixeira (1990) drew on a wealth of experience with many of the large American banks in McKinsey and Company’s financial services consulting practice and presented arguments about why ICT investments in the major lines of the commercial banking business create value for banking customers, but destroy profitability for the firms that service them. Bansal (1993) discussed the advances in risk management technology and suggested the use of business value linkage to identify the benefits of such ICT investments. Banker and Kauffman (1988) showed that ATM membership choice has a significant and positive

influence on a bank branch’s market share of local deposits based on a study of a group of Pennsylvanian banks. Lichtenberg (1995) found that the earliest adopters of ATMs were able to achieve a sustainable gain in the market share based on an analysis of the Federal Deposit Insurance Corporation data in USA. Alpar and Kim (1990) used a translog cost function to measure the impact of the use of ICT on economic performance of banks. Based on their analysis of the Federal Reserve Bank’s Functional Cost Analysis (FCA) data, they concluded that ICT has been cost reducing and labour savings. Based on the same data set, Parsons and Denny (1993) found that although, not all banks benefit from ICT spending, some banks do.

In the case of Nigeria, very little empirical research has examined ICT impact on corporate performance. One of such limited studies was conducted by Idowu (2002) on the effect of ICT on the growth of the banking industry in Nigeria. This study assesses the perception of banking customers on the quality of banking services using a questionnaire survey. The study sampled five commercial banks namely; Wema Bank Plc, Union Bank, Omega Bank, Corporative and Access Bank. It examines one major issue; impact of ICT on bank services but in three different perspectives namely effect of ICT on banking services, effect of ICT on customer services and on bank productivity measured in term of speed of operation. It concludes that ICT has contributed immensely to the growth of the banking industry in Nigeria.

The second study is that conducted by Oyeyinka (1996) on ICT in the finance sector. It examines the adoption of computers in Nigerian banks with specific reference to the specific ways computer is affecting the organisation of work and constraints to its adoption. The study covered twenty financial institutions comprising of twelve commercial banks, five merchant banks, one development bank and two mortgage institutions. Although the study did not set out to evaluate productivity gains, it concludes that given the enthusiastic adoption of computers by Nigerian banks, the perceived benefits may have outweighed the costs of adoption. These studies indicate that there is paucity of literature on impact of ICT on corporate performance in the banking sector.

Research MethodologyThe study used secondary information such as annual statements of accounts of the sampled banks, Nigerian Deposit Insurance Commission (NDIC) and Central Bank of Nigeria (CBN) publications to determine the



performance of the banks via such performance measures as net income (the dependent variable) against the various investments of banks, which include ICT investment, investments in non ICT labour and other investments for a period of ten years (1998 to 2007). The study used multiple regression analysis. The multiple regression analysis was done with the aid of Statistical Package for Social Science (SPSS) version 15.0. In the following hypothesis there is a regression equation needed to establish the relationship;Hypothesis : ICT applications and investments do not contribute significantly to the profitability of Nigerian banks.To test this relationship, the following regression equation is stated:Netincomt = a + Annuictvestt + AnnuOpercostt + Annuvestossett + e i1

Where: a = Intercept

Netincomt = Corporate performance at time t measured by Net income.Annuictvest = Annual ICT Investment AnnuOpercost = Annual Operating Costs Annuvestosset = Annual Investment on other Assets

e = Error leveli

Data Presentation and Analysis of ResultsThe study utilised data collected from the eight (8) sample banks. The sample banks are arranged alphabetically as follows:List of Sample Banks

Afri Bank UBAEco Bank Union BankFIN Bank Wema BankFirst Bank Zenith Bank

Results and Discussions of FindingsThe following tables represent the results of the regression equation.

Table 1: Regression results on ICT contribution to Banks performance

Model Un-standardized Coefficients Standardized T Sig. Co-linearity Coefficients Statistics

B Std. Error Beta Tolerance VIF B Std. Error1 (Constant) 1533646367.075 1048528385.486 1.463 .194 ICTI 1.520 1.643 .259 .925 .390 .316 3.160 O.I 1.325 .516 .704 2.570 .042 .330 3.029 OP.C -.586 1.463 -.066 -.401 .702 .905 1.105

The information on Table 1 presents a picture of ICT contribution to bank performance in Nigeria. In general, it is apparent that ICT investments have some contributions to banks performance. The significance level for ICT from Table 1 above is 39%. By implication, we accept the null hypothesis and reject the alternative hypothesis, thereby implying that Information and Communication Technology (ICT) investments have no significant contribution to the profitability of Nigerian banks.The significant level is 39% as against 5% level chosen.The results equally revealed that at 5% significant level, the significant level of other investments on net income

is 4.2% .Since this is less than the 5% level chosen, it implies that, investments in other assets (i.e. other than ICT) have significant contribution to the performance of Nigerian banks. Also, at 5% level of significance chosen, the operating costs as regressed on net income showed a significance of 70.2%. This is higher than 5% chosen, implying that operating costs has no significant contribution to the income of Nigerian banks.

The Variable Inflation Factor as revealed in Table 1 is 19.4%, meaning that there is co-linearity between the unexplained variable and some of the independent variables.

2 3



Table2: Regression results on R, R square and Durbin – Watson Tests

Model R R Square Adjusted Std. Error of Change Statistics Durbin-WatsonR Square the Estimate

R Square F Change Df1 df2 Sig. F R Square F Change df1 Df2 Sig. F ChangeChange Change

1 .923(a) .851 .777 1224241879. .851 11.454 3 6 .007 1.982 04546

The information on Table 2 represents the results of R, R square and Durbin Watson tests. R Test shows a result of 20.92 implying a strong correlation between dependent variable and independent variable, R test revealed that 0.851

of the changes in net income is as a result of ICT investments, other investments and operating costs. Durbin Watson test result is 1.982, meaning that there is no auto correlation.

Table 3: Regression results on ANOVA

Model Sum of Df Mean F Sig.Squares Square

1 Regression 514996 3 17166536 11.454 .007(a)087931 26438055416000 0000.00000.000

Residual 899260907045 6 14987681 261000 78408768

0.000 000.000

Total 60492217863594200000.000 9

ANOVA test whether there is regression at all. The result in Table 3 above shows a significant level of 0.007 or 0.7%, implying that there is regression. It was discovered that ICT investments and applications do not contribute significantly to banks’ performance in Nigeria.

It was discovered that other investments, which include: short-terms funds, short-terms investments, loans and leases, cash and interest bearing deposits with other banks contribute significantly to the profitability of Nigerian banks.

Investment on non ICT labour and other related costs have been found not to have significant impact on banks performance. This is because the huge sums of money invested were not commensurate with the returns, thereby reducing profitability.

Conclusions and Recommendations Based on the findings above, the following conclusions

emerge:Nigerian banks currently use ICT as source of competitive advantage and not as strategic necessity to improve profitability. This stems from the fact that they are yet to derive maximum benefits from the use of ICT. Secondly, ICT used in Nigerian banks is significantly constrained by ICT related problems.

The following recommendations are likely solutions to improve on the earnings of financial institutions on the effective use of ICT:

a) The Nigerian banks need to integrate all types of ICT into the main stream of banking operations to maximally experience a positive impact on their performance.

b) In order to obviate the problem relating to effective use of ICT as a performance improvement strategy, there is need for mergers and consolidations among Nigerian banks. Twenty mega banks certainly will have the wherewithal to completely leverage the use of ICT. This is because their large asset base will guarantee the



ability to overcome most, if not all of the ICT related problems.

c) The government needs to encourage indigenous development and manufacture of computer hardware, software and other ICT applications in order to reduce the cost of importing these applications.

d) Infrastructural facilities are imperative for banks to take advantage of ICT. The current state of infrastructural facilities in Nigeria is appalling. For the country to have a proper and functional cashless economy there must be concurrent use of both debit and credit cards and the only way this can be realised is through the improvement in the infrastructural facilities of the network and power supply.

d) Banks need to train staff in the maintenance of ICT applications internally. High cost of regular maintenance coming from outside would be reduced drastically if there is very good internal maintenance culture. This will go a long way in saving the profits of the banks being eroded as a result of high cost of maintenance of ICT applications externally.

e) Banks should be aware that without complimentary investment on business process reengineering, the opportunity currently made available by ICT applications may change to threat.

f) Banks should implement security measures that make use of biometrics. Biometric security is a fast growing area of computer security. These are security measures provided by computer devices that measure physical traits that make each individual unique.

ReferencesAhmad, S. (2008): Impact of Information Technology

on Productivity, A Masters Thesis submitted to Tarbiat Modares University, Iran.

Akhavan, P. (2006). “Exploring the Interdependency between Reengineering and Information and Communication Technology by Developing a Conceptual Model”: Business Process Management Journal.

Al-Hashimi, A. (2007); Determinants of Banks Spreads in Sub-Saharan African,

Alpar, P. And Kim, M (1990): “A Microeconomic approach to the measurement of information technology value,” Journal of Management Information System, Vol.7, pp.55-69

Angbazo, L. (1997); Commercial Banks, Net Interest Margins, Default Risk, Interest Rate Risk, and Off-Balance Sheet Banking, Journal of Banking and Finance 21, 55 – 87

Banker, R.D. and Kauffman, R.J. (1988): Strategic Contributions of Information Technology: An Empirical study of ATM networks. Proceedings of the Ninth International Conference on

Information SystemsBansal, A. (1993): “Financial Risk and Financial Risk

Management Technology,” Information and Management, Vol.24, pp.267-281

Brynjolfsson, E. & Hitt, L. (1993): “Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending”: Journal of Management Science.

Calderon, T.G (2001): Information Technology and The Performance of Financial Companies in South Korea, Journal of Applied Business Research, 17(2)

Gelos, Co. (2006), Banking Spreads in Latin America, IMF Working Paper 06/44.

Idowu, P.A. (2002): The Effect of Information Technology on the growth of the Banking Industry in Nigeria, The Electronic Journal on Information Systems in Developing Countries, 10(2), pp.1-8

Jim, O. (2006). Development of the Nigerian Financial Market, Paper presentation at National Workshop, Financial Services Registration Co-ordinating Committee, Abuja.

Kayode, (2005): Business Information and ndCommunication Systems: 2 ed., Jos, Nigeria.

Lichtenberg, F. (1995): “The output contributions of computer equipment and personnel: A Firm Level Analysis” Journal of Economics of Innovation and New Technology.

Oyeyinka, B.O. (1996): Information Technology in the Finance Sector: Adoption of Computers in Nigerian banks. NISER Monograph series, No.3

Parsons, D., Gotlieb, C.C. & Denny, M. (1993) “Productivity and Computers in Canadian Banking” in Griliches, Z. and Maresse, J. (Eds) productivity issues in services at the micro level, Klumer, Boston.

Saunders, A. and L. Schumacher (2000): The Determinants of Bank Interest Rate Margins: An Int’l Study, Journal of Int’l Money and Finance 19, 813 – 832

Steiner, T.D. and Teixeira, D.B. (1990): Technology in Banking: Creating Value and Destroying Profits, Homewood, IL: Business One, Irwin

Weill, P. (1992): “The Relationship between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector”, Information Research, Vol.3, pp. 307-333

*The author is a lecturer in the department of Accounting, Nasarawa State University, Keffi, Nigeria.


ECONOMIC IMPLICATION OF COLLAPSE OF ENTERPRISES

2.0 Introduction

There appears to be no universally agreed definition

among scholars regarding the conceptual meaning of

public enterprises. According to Laleye (1985) the

bewildering number and types of the organizations

called “public enterprises” their different contents and

the rationale for which they are set up accounts for lack

of authoritative and generally acceptable definition of

public enterprises. Sonsa (1983) opined that there are

many reasons why in developed capitalist countries,

there is no single standard definition of public

enterprises. Public enterprises were established at

different periods, and each epoch naturally brought forth

the types of public enterprises most clearly matching its

own conditions. It is therefore believed that the

variations in definition are informed by ideological,

values, interest disposition and circumstances that

brought public enterprises into existence.

Whatever the controversy and the lack of uniformity

might conjure up, we would however review the

viewpoint of some scholars of public enterprises. For

instance, Efange (1987) defines public enterprises or

parastatals as institutions or organizations which are

owned by the state or in which the state holds a majority

interest, whose activities are of a business in nature and

which provide services or produce goods and have their

own distinct management.

Obadan (2000), Obadan and Ayodele (1998) defined

public enterprises as organization whose primary

function is the production and sale of goods and/or

services and in which government or other government

controlled agencies have no ownership stake that is

Economic Implication of Collapse of Nigerian Public Enterprises

1.0 Abstract

Public enterprises in Nigeria were established to propel socio-economic development and to guard against the control

of the economy from foreign domination and exploitation. This accounts for why a larger proportion of the national

budget has been voted for the creation and sustenance of public enterprises. In spite of this, the performance of public

enterprises has been replete with varying contradictions. This paper tries to review the implication of public

enterprises collapse to Nigeria’s economy and make suggestions for the sustainability of the public enterprises in

Nigeria.

sufficient to ensure their control over the enterprises

regardless of how actively that control is exercised.

In another dimension, Nellis (1986) refused to give a

precise definition of public enterprise, but only adduced

reasons for its creation. He observed that there are many

reasons that explain why African states have created and

sustained public enterprises.

“institutions and pre-dispositions inherited from

centralized interventionist colonial regimes; a tendency

to associate liberal capitalism with colonialism and

imperialism; the post war ascendancy of leftist/statist

political ideologies; the apparent absence or embryonic

nature of the indigenous private sector; the conversion of

failing private enterprises into public enterprises to

foster increases in employment; the attractiveness of

public enterprises to politicians who use them as

patronage mechanisms to distribute jobs to both the

mighty and the minor- these are but some of the more

important historical economic, social and political

factors which have led almost every African state to

create large public enterprise sector”.

The basic reason for establishing public enterprises in all

economies has been to propel development. Hanson

(1972) reflecting on Turkey, Mexico, India and Nigeria

noted that the establishment of public enterprises is

premised on what he considered as obstacles to economic

development in the post independence states. It is also

instructive to note that in Nigeria like many developing

countries, public enterprises are used as employers of last

resort. According to Hemming and Mansor (1988a) it is

noted that state owned enterprises enable government to

Miskom Attahiru



pursue goals of social Equity that the market ordinarily

ignores. Similarly, Ugorji (1995) observed that the

public enterprises have also been established for political

reasons. Many governments’ undertakings are used to

provide jobs for constituents, political allies, and friends.

The location of public enterprises and the distribution of

government employments have further been defended,

on the need to maintain “federal character” and promote

national integration.

Other factors that accelerated the growth of Nigeria’s

public sector were the indigenization policy of 1972 as

enacted by the Nigerian enterprises promotion Decree. It

was designed to control the commanding heights of the

economy. The policy further provided the much needed

legal basis for extensive government participation in the

ownership and control of significant sectors of the

economy. It also reinforced the increasing dominant of

the public sector in the economy.

In spite of the impetus given to public enterprises

especially in Nigeria some criticisms are levelled against

them. Their problems are so enormous that they even left

the Nigerian public in a state of great disillusionment.

These criticisms vary from lack of profitability and

reliance on large government subsidies. Ogundipe

(1986) once argued that between 1975 and 1985,

government capital investments in public enterprises

totalled about N23 billion. In addition to equity

investments, government gave subsidies of N11.5 billion

to various state enterprises.

All these expenditures contributed in no small measure

to increased government expenditures and deficits.

Similarly, public enterprises suffer from gross

mismanagement and consequently resulted to

inefficiency in the use of productive capital, corruption

and nepotism, which in turn weaken the ability of

government to carry out its functions efficiently (World

Bank, 1991). There are avalanche of literatures that point

to the problems of public enterprises especially in

Nigeria. They include Ajakaiye, 1990; Ayodele, 1988;

Okigbo, 1988; Kalu, 1999; Obadan, 2000; Sanusi, 2001.

All these scholars have developed growing interest on

the conception and function of public enterprises and

implications of their collapse to the national economy.

3.0 Historical Perspective on development of Public

Enterprises in Nigeria

The private sector was the traditional structure of the

world’s economies. The Nigerian economy is largely

private-sector based. The public sector emerged in

Nigeria as a result of the need to harness rationally the

scarce resources to produce goods and services for

economic improvement, as well as for promotion of the

welfare of the citizens. The involvement of the public

sector in Nigeria became significant during the period

after independence.

The railways were probably the first major example of

public sector enterprises in Nigeria. At first, conceived

mainly in terms of colonial strategic and administrative

needs, they quickly acquired the dimension of a

welcomed economic utility for transporting the goods

of international commerce like cocoa, groundnut, and

palm kernels. Given the structural nature of the colonial

private ownership and control of the railways in the

metropolitan countries, it will hardly be expected that

the Nigerian Railway Corporation could have been

started as any other project than as a public sector

enterprise for such mass transportation.

The colonial administration was the nucleus of

necessary economic and social infrastructural facilities

that private enterprise could not provide. Facilities

included railways, roads, bridges, electricity, ports and

harbours, waterworks, and telecommunication. Social

services like education and health were still

substantially left in the related hands of the Christian

Mission. But even at this initial stage, government itself

moved positively into some of the direct productive

sectors of the economy: the stone quarry at Aro, the

colliery at Udi, and the saw mill and furniture factory at

Ijora. Those were the early stages.

4.0 Collapse of public enterprises

The emergence of the crude oil industry into the

Nigerian economy, after the civil war in the 1970s, with

the associated boom intensified governmental

involvement in production and in control of the

Nigerian economy. One major aim of government at

that time was to convert as much as possible of the

growing oil revenue into social, physical, and economic

infrastructural investments. The Nigerian Enterprises

Promotion Decree of 1972, which took effect on 1 April,



1974, with its subsequent amendment in 1976, provided a

concrete basis for government’s extensive participation

in the ownership and management of enterprises. Given

these developments, public enterprises at the federal

level had exceeded 100 in number by 1985; and these had

spread over agriculture, energy, mining, banking,

insurance, manufacturing, transport, commerce and

other service activities. Before long, a range of Nigerian

Public Enterprises has stretched from farm organizations

to manufacturing, from municipal transport to mining,

from housing to multipurpose power, and from trading to

banking and insurance. At the state and local government

levels, the range of activities that had attracted public

sector investment also had become quite large. Thus, a

variety of enterprises – with public interest in terms of

majority equity participation or fully-owned by state and

local government as well as other governmental entities-

became visible in various parts of Nigeria. Between 1975

and 1995, it was estimated that the federal government of

Nigeria had invested more than $100 billion in public

enterprises.

5.0 Economic implications

· Rising Prices- Opponents fear that the private sector

will exploit consumers where there is monopoly or

oligopoly power such as by raising the prices of goods.

· Creating poverty- At the heart of the criticism of

privatization is the perception that it has not been fair-

hurting the poor and the vulnerable work force, while

benefitting the rich, the powerful, and the privileged

thereby perpetrating poverty.

· Breaking of unions-Workers dismissed as a result of

privatization have great difficulty finding other work;

the large number of people out of jobs is forced to

accept jobs with lower pay, less security, and fewer

benefits. They therefore, believe that the aims of

privatization are to reduce labour costs and numbers,

and to break union.

· Corruption- There is this argument that even if

privatization contributes to improve efficiency and

financial performance, it has a negative effect on the

distribution of wealth perhaps arising from corruption.

Corruption is the single most destructive factor

responsible for the pitiable state of affairs in many

developing countries. It distorts the economy through

waste and misallocation of resources and creates need

for external assistance. Transparency international has

for a long time decried the evil consequences of

corruption and has identified acute corruption in many 1countries. For example, in 1997 , its annual corruption

index rated Nigeria as the most corrupt country on

earth, followed by Pakistan and Kenya. By 1998, the

index moved and Cameroon displaced Nigeria as 2number one. Some misguided Nigerians have argued

thus “...after all, corruption is everywhere, including

industrialized countries.” It is true that corruption is a

worldwide phenomenon, and so are industrial

development and technological advancement. Why is

it then that when industrialized countries are pushing

for technological invention, African countries are busy

expanding only the frontiers of corruption and poverty-

prone ventures.

· Public enterprises should stay- There is this strong

belief that privatization is not necessary. Public

enterprises need not run at a loss; all they require is

good managers, less political interference, competent

boards of directors, and especially more rational

prising policies.

· Injustice- there is an assertion that it is the politicians

and bureaucrats that caused the public enterprises to

perform poorly but only labour is asked to carry the

burden of the reform. Critics view this as injustice.

· Exploitation by capitalist countries – Privatization is

seen as an imposition by foreign capitalist and agencies

like the IMF and the World Bank; therefore,

privatization must be meant to exploit the developing

countries.

· Privatization is foreign- Some critics have argued that

privatization is neo-colonialism since the policy is

being pushed by International Monetary Fund, World

Bank, and their agencies. It is not an indigenous idea;

therefore, it will not work.

· Labours demand for job protection- Right from

onset, the most publicly persistent and organized

opposition of privatization in Nigeria has come from

the labour movement. There always have been strikes

and counter strikes against any decision to privatize a

government agency. Sometimes workers have

succeeded in blocking or slowing down the

privatization of specific enterprises. In other cases the

government simply has brushed aside the labour

opposition leaving a legacy of anger and political

tension. What is obvious is that workers are reacting

against threatened jobs or the possibility that benefits

might be jeopardized under new management.



Perhaps it might be likely that it is the continued pressure

from World Bank to get the reform process moving and to

keep it on track that causes some of these humanitarian

issues somehow to be brushed aside. These indictments

are not a reality. The fears about privatization are not only

Nigerian made Apprehension. Worldwide, proponents of

labour have been the most vigorous and persistent. Critics

of privatization are consistently portraying its negative

efforts on income distribution and worker welfare. Not

enough is yet known empirically about the impact of

privatization in Nigeria to form definitive judgements; the

current statement on the issues still lies between

proportions and conclusions.

6.0 Conclusion

From what we have seen above, it is very clear that

successive administrations came up with different kinds

of reforms in an attempt to address the crises Nigerian

economy faced, but the implementation had been less

than satisfactory. Frequent policy inconsistencies and

reversals, lack of political will, corruption and

appropriate value orientation hampered the judicious

implementation of the past reform programs. The

economic reform program of the present government is

aimed at addressing the shortcomings of the

implementation of the past reform programs, as well as

place the national economy on a strong, sound and

sustainable footing. As the implementation and funding

issues get sorted out and the implementation of banking

sector reform gets into full gear, the attendant growth of

the real sector and the de-regulation of the downstream

sector will usher in a new lease of life into the economy

and the people of Nigeria. No doubt, the challenges are

daunting and too numerous to mention. However, with the

will, commitment and right value re-orientation among all

stakeholders, a lot of progress will be achieved in our

match to sustainable economic recovery.

7.0 References

Aboyade, O. (1974): “Nigerian Public Enterprises as

an organizational Dilemma” in public

Enterprises in Nigeria. Proceedings of the 1973

Annual Conference of the Nigerian Economic

Society. Federal republic of Nigeria (1986):

structural Adjustment Programme for Nigeria.

Lagos: Federal Government Printers.

Ahmed, A.(1985), The Current State of the Nigerian

Economy and Its challenges to Policy Makers,

Bullion, Vol. 9 No. 4,CBN, Abuja Central Bank of

Nigeria (2004), A Guideline and Incentives on

Consolidation in the Nigerian Banking Industry,

Federal Government of Nigeria (2000),

Obasanjos’ Economic Direction: 1999-2003,

Office of the Honourable Minister Economic

Matters, Abuja. Federal Government of Nigeria

(2004), National Economic Empowerment and

Development Strategy (NEEDS), National

Planning Commission , Abuja. Federal

Government of Nigeria (1997), Report of the

VISSION 2010 committee, September, Abuja.

Nightingale, S.M; Pindus, M.N. (1997): Privatization

of Public Social Service: A Background Paper.

Unpublished.

Nwoye, M.I. (1995): Small Business Enterprise: How to

Start and succeed. Benin Social Science Series for

Africa.

Nwoye, M.I. (1997): Management Practices and

Performance Determinants of Public and

Private Sector Enterprises in Anambra, Edo

and Delta States of Nigeria: A Factor analysis.

National Productive Centre, (1991): Productivity

for Self Reliance and excellence. Proceeding of the st1 National Productivity Day Celebration, 21

February 1991, Lagos.

Obadan, M.I. (1993): Wither Structural Adjustment in

Nigeria. Ibadan: NCEMA Monograph Series No.

3. Transparency International, “Transparency

International Publishes 1997 Corruption

Percpetion Index”, Press Release, Berlin 31 July

1997.

Yahaya, S. (1991): “The performance of public

Enterprises in an International Context: An

Empirical study” in Public Enterprise in Nigeria.

The Nigerian Economic Society Annual

Conferences, Sokoto. World Bank (1994a):

Adjustment in Africa: Reforms, Results and the

Road Ahead. Washington, DC: The World Bank.

World Bank (1994b): World Development Report,

1994: Infrastructure For Development.

*The author is head of Finance and Accounts, National Board for Technology Incubation (NBTI) Technology Incubation Centre, Bauchi, Federal Ministry of Science and Technology, Abuja.


SMALL AND MEDIUM SCALE ENTERPRISES

1. Introduction There has been increased emphasis on growing small and medium scale enterprises (SMEs) as a dependable approach to alleviating poverty, employment generation, industrialization and general economic development (Ariyo, 2000; Olaitan, 2006). Generally, small and medium scale enterprises are an umbrella term used to describe businesses apart from other characteristics that employ less than 100 employees. A study conducted by the Nigerian Federal Office of Statistics revealed that 97 percent of all businesses in Nigeria fall under the SME category. The sector provides on average 50 percent of Nigerian employment and 50 percent of industrial output (Ariyo, 2000).

The proportion of Nigerian SMEs and their impact on the economy is much similar to those in other countries of the world especially in advanced economies. There are approximately 23million small businesses in the United States. These altogether employ more than 50 percent of the private workforce and generate more than half of the nation’s GDP. In the European Union, SMEs account for 98 percent of all companies and 65 percent of business turnover in the region.

However, there are differences between the SMEs in these advanced countries and their counterparts in Nigeria. The difference lies in the importance attached to the SMEs sector by the government of each country and the role they play in economic development. In the UK, these businesses not only form the bedrock of British economy but they are widely accepted as the main hub of economic activity in the country. They are not just seen as job creators but as creators of wealth. On top of it all, the UK government firmly believes that small and medium sized businesses are crucial to a successful enterprise economy and is fully committed to stimulating the creation, competitiveness and growth of new businesses. The approach of these advanced economies consists of concrete ideas on fostering an

The Nigerian Experience in Small and Medium Scale Enterprises (SMEs) Cluster Formation

Onyima Jude K.

AbstractThe major problem of small and medium enterprises (SMEs) is not their size but being isolated. Clustering raises the capacity of SMEs to respond to opportunities and also to reap the gains of economies of scale. Indeed, many economies have improved exports and SMEs’s share of GDP through clustering but could that be feasible in the Nigerian context. In this paper, after showcasing the potentials and challenges of Nigerian clusters, the study provided a framework for evolving competitive clusters in Nigeria.

enterprising culture that encourages innovators and risk takers, providing and maintaining a supportive economic environment, identifying and removing barriers to growth and providing high quality business support for firms at all stages of their development. This is different with what is obtainable in Nigeria and other developing countries. Whilst the governments of these advanced countries see their SME sector as crucial to their continued growth and development, the Nigerian government to put it mildly does not have any concrete idea of what hidden potential lies within its SME and if it does, has no idea how to harness it.

The constraints faced by SMEs in developing countries are not only accentuated with ineffective policy design but also by market failures in the region (Uzor, 2004). What is needed basically is mutual support among the SMEs so as to give them leverage over market failures prevalent in the region. Recently, the debate on relevance of clustering as alternative strategy for industrial development in developing countries have dominated many discussions in economic and industrial organization literatures. Experts in development economics have shown empirical evidence that small firms in developing countries can grow and be competitive as well through cluster formation. Sengerberger and Pyke (1992) pointed out that the problem of many small enterprises is not their size but being isolated. This is because small enterprises individually have little capacity to respond to competitive pressure and to generate expansion. Nadvi and Schimtz (1999) while analyzing how clustering can help SMEs to mobilize human and financial resources argued that clustering raises the capacity to respond to crisis and opportunities since the capabilities of clustering firms can be combined in many different ways. The burning question is whether the above statement is true in Nigerian contexts to the need to encourage clustering of SMEs in Nigeria.

This paper therefore argues that SME clusters have the



potentials to increase the competitiveness of Nigeria SMEs. It focuses on addressing key problems confronting SME cluster formation and efficiency and how Nigeria can benefit from encouraging SME clusters. This paper is structured in four parts. Following the introduction is the conceptual framework, where the definition of cluster, reasons for cluster formation and determinants of cluster growth are discussed. Part 3 discussed the Nigerian experience in SME cluster formation, problems confronting competitiveness of SME cluster and possible solution to them. Finally, the conclusion of the work is in part 4.

2. Conceptual Framework Of SME Cluster Formation Definition of clustersSchmitz (1992) defined cluster as a group of enterprises belonging to the same sector and operating in close proximity to each other. Schmitz’s approach was drawn not only from Marshall’s analysis but also from his experience on growth constraints of small industries in developing countries. Porter (1998) further defined clusters as geographical concentration of interconnected firms and institutions in a particular sector. Generally, clusters can be defined in terms of the nature of relationships existing between the firms since such linkages are very important in strengthening competition. In the views of Steiner and Hartmann (1998), clusters are highly competitive because the links are governed by the advantages of market mechanism and the direct structure of a single organization. They see the nature of relationship among firms as complementary. Clusters can also be defined in terms of functional relationship existing among the firms. Elsner (2000) following this functionality approach defined clusters as groups of firms that are functionally interconnected vertically as well as horizontally. This approach underscores the kind of relationships existing between firms and institutions supporting the cluster and such relationships are determined through the market.

Owing to importance attached to face-to-face business transaction in Nigeria and because of weak economic institutions and physical infrastructures, the definition of clusters according to Uzor (2004) is adopted to suit the Nigerian business environment. He defined clusters as groups of small firms operating in a defined location, producing similar products or services, cooperating and competing with one another, learning from each other in order to overcome external challenges and reaching developed market through developed networks. This definition is most appropriate since it reflected the structure of clusters we have in Nigeria as well as their mode of operation. The issue of defined location is crucial because for African clusters, the location serve as advertisement strategy for the firms in the cluster.

Reasons for Encouraging SME ClustersAccording to Schmitz (1995), clustering raises the

capacity to respond to crisis and opportunities since the capabilities of specialized clustering firms can be combined in many different ways. Successful empirical reports on SME cluster development emerging from Latin America and Asia provided evidence to support why SME clusters should be encouraged. In Sinos Valley, South of Brazil, external influence induced by market led the shoe clusters to upgrade from 1960s to the present date in three different forms. In the 1960s, the production system in the cluster changed from import substituting craft production to mass production. In the 1970s, it shifted to quality and export oriented system while in the recent time, it has moved to high flexibly specialized form of production organization with more emphasis on high quality standard (Uzor, 2004). This is in line with the findings of Cawthorne (1995) that market as a function of cluster development begins with the domestic market. Producers turned aggressively to export markets when the domestic market was close to saturation point in order to sustain growth. Export growth is built through the experience gained from quality production for local market and the network built with the foreign buyers.

Mitullah (1996) further argued that concentration of largely homogenous enterprises in a defined geographical area facilitates various forms of intervention because of similarity of needs and support requirement. Indeed the rate of dissemination of best practices and distribution of the fixed costs of interventions among a large number of beneficiaries are easier. In clusters, enterprises’ joint initiatives are stronger because of the vested interest of the parties, more cost effective due to shared fixed cost and easier to coordinate, with proximity fostering mutual knowledge and trust. SME clusters encourages the existence and efficiency of social capital. Social capital is defined as a capital jointly owned by the parties in relationship and is not divisible. It is the final arbiter of competitive relations because it generates positive interactions within a firm, among groups of firms and within an industrial district in order to reduce transaction costs and propagate growth. Social capital is a critical variable in industrialization and has significant influence on the mobilization of other factors of production especially in producing public goods.

Anyanwuocha (2010) asserted that SME clustering brings about the emergence of subsidiary firms to cater for the needs the clustering firms. It leads to division of labour and specialization which are the bedrock of industrialization and critical for increasing output and efficiency. Clustering brings about cooperation among the firms which help in development of trade associations and cooperatives in order to enjoy the benefits of bulk-purchase and large-scale production. Common problems are easily identified for solution in SME clusters

Determinants of SME Cluster Formation and GrowthCluster formation and growth are influenced and



propagated by the stock of economies of scale, the size of the market and nature product, the nature of collective efficiency, the nature of supporting institutions, and the rate of upgrading:

Stock of economies of scale: Increasing returns are the by-product of economies of scale. According to Anyanwuocha (2010), economies of scale are the advantages of large scale production which a business concern can achieve by increasing the volume of its production. There are marketing economies, financial economies, managerial economies, risk-bearing economies and economies in research and development. Stock of economies of scale that induce increasing returns are measured by the ability of the firm to reach more markets and to acquire more capital goods, effective managerial skills and opportunity to enjoy division of labour in production. Unfortunately, as observed in McCormick (1998), African enterprises are unorganized in production activities. Surely, low investment on capital goods and lack of division of labour make the enterprises to remain weak. When returns from economies of scale are high, clusters tend to form and grow. On the other hand when it is low, there will be little incentive to form and grow clusters.

The size of the market and the nature of product: Market size is an important factor for cluster development because of the scale of product demand determines the growth rate of the producer. SME clustering propagates successive layers of specialization once the overall scale of demand grows. It is important to note that the impact of clustering in Africa is limited because of low demand for their product caused by low income. McCormick (1998) further argued that interregional restrictions on movement of goods and people and underdeveloped distribution system undermine market development in Africa.

Furthermore, the quality of products offered to final consumers plays a critical role in formation and growth of any SME cluster. The traditional quality standard of products is determined by the durability, reliability and the extent the product conforms to specification. Product quality is a function of process and functional upgrading which is lacking in Africa. Some entrepreneurs especially in south eastern Nigeria do not engage in intensive learning process in production engineering and do not employ better application of production factors (Uzor,2004). This results in organizational deficiencies, unsystematic production processes and poor quality standard, high cost of production and waste of scarce resources.

The nature of collective efficiency existing in the cluster: collective efficiency is the competitive advantages derived by small firms from local external economies and joint actions. Two forms of benefits arising from clustering of products include efficiency gains and gains for acting together to achieve some desired end (Schmitz, 1997;

Nadvi, 1998; McCormick, 1998). Gains associated with agglomeration of industries in geographical location include pooling of specialized skills workers and rapid diffusion of know-how and ideas. There are also gains of quicker access to intermediate inputs and technological spillovers. Joint actions also are another factors that determine cluster formation and growth. They are actions deliberately and jointly pursued in order to strengthen growth, overcome impediments and induce a positive turning point of the clusters. However, most African clusters do not expand due to absence of collective efficiency through vertical integration and specialization. Reason being the partial monopoly they enjoy in the local market and quality of human capital.

Effectiveness of institutions supporting the clusters: institutions are important not only in industrialization process but also in general economic development. These supporting Institutions are social capital and in most cases, the final arbiter of competitive relations (Uzor, 2004). They generate positive interactions among groups of firms and within an industrial district in order to reduce transaction costs and propagate growth. Social capital also has influence on the mobilization of factors of production such as financial capital and labour which are crucial in producing public goods. The extent of voluntary and spontaneous cooperation existing within a given community depends on the stock of inherited social capital. Social capital is classified into two forms: collective and specific social capital. Collective social capital is the mutual cooperation that sustains the survival of economic relations, repeated transaction and inter-firm transactions in a community or in an industrial cluster. Specific social capital is based on personal reputation necessary to sustain repeated transactions. This personal reputation is very effective when the economic activities are linked because information about past performances of an actor can be easily accessed. North (1990) acknowledged the importance of these institutions as the third party that can maintain the rules of the game in transactions by enforcing contract agreements and prevent opportunistic behaviour. Uzor (2004) observed that such institutions exist but are very weak in Africa thus undermining private sector development. This weakness is usually attributed to institutional problems and unstable economic conditions.

3. Nature Of SME Clusters In Africa: Evidence From NigeriaPedersen (1997) identified four major types of clusters prevalent in Africa: diversified industrial cluster, the subcontractor cluster, the market town-distributive cluster and the specialized petty commodity cluster. Although there is a limited account of SME cluster development in Africa, recent studies revealed that clustering has potentials for industrializing Africa. Van Dijk (1997) in examining the impacts of networks in small enterprises in Accra, Ghana provided insight on poverty alleviation strategies of these



clusters. McCormick (1997) studying the typology of Nairobi industry clusters in Kenya listed the benefits of clustering to include upgrading of technology in use, better information management and reduced costs of operation. Generally, in contrast to global trend of cluster development, African clusters have not been able to move beyond producing for local markets.

Most of the SME clusters in Nigeria appear to have an informal structure. This is because of the unorganized nature of production system, coupled with absence of division of labour and specialization. For instance, the workshops of the Ogui carpenters in Ogui ward of Enugu and Asata Carpenters in Asata ward of Enugu.(Uzor, 2004) are divided proportionately but the working place is crowded. This implies that the production area is very small and expansion cannot take place. The economy of the clusters is relatively small. The main external economies for the firms are access to the market. Nigerian clusters usually attract traders from city markets. However, they face no major problem with large producers. This is because there are no huge manufacturing firms to compete with. Economies of scale and scope are difficult for most Nigerian SME clusters because their total factor productivity (TFP) is very low due to the number of workers per unit of enterprises and the nature of technology existing in the clusters. The technology in use in these clusters is basic hand tools and as a result, external economies are always minimal. Export possibilities of the products produced in these clusters are little because the quality of these products is far below standard. Nadvi (1999) maintained that the quality of standards determines the export drive of clusters. They produce low quality products because there is low competition; producers turn to export possibilities only when the local market is saturated. Also, collective efficiency in most Nigerian clusters is limited because there are no external challenges.

Uzor (2004) in studying SME clusters in southeastern Nigeria observed that inter-firm relationship in these clusters is mainly horizontal. They include sharing of transportation costs, sharing of knowledge on the market situation, sharing equipment and hand tools and sharing of information on new designs. He noticed that they embarked on joint actions such as bulk buying not specifically to overcome external challenges or reach distant market but to reduce production cost.

Prospects of Nigerian SME Clusters: The Nnewi ExampleClustering allows SMEs to reap the gains of economies of scope which arise due to efficiency of the firms to engage in more than one activity successively. There are three kinds of economies of scope: concurrent scale economies, coordinative scale economies and technical know-how sharing economies (McCormick, 1998). Concurrent scale

economies are the economies gained by enterprises in diversifying their products with the least possible output cost. Coordinative scale economies imply that the enterprises have the organizational ability to integrate factors of production in an effective production system. Technical know-how economies are benefits gained by small firms clustering because individual firms cannot alone afford the cost of high technical skilled workers or invest in capital goods.

Nnewi town is located about 50km southeast of Onitsha. The economic development in Nnewi started in 1960 but became active through trading activities in Nkwo market in 1970 after the Nigerian civil war. The growth of Nkwo Nnewi market can be analyzed as specialization effects on trading in different branches of motor spare parts. This developed to an agglomeration of small trading merchants. Effects of these agglomeration include information-sharing, learning and rise of support institutions as well as specialization effects leading to network building. There were quite noticeable evolutionary processes in network development in these clusters ranging from formation of social groups, trading norms, trading rules to cooperation and control based on sanction. Oyeyinka (2001) noted that Nnewi clusters have been identified with diverse forms of social networks which are associated with kinship, personal ties, culture, trust and reciprocity and competitive behaviour.

Uzor (2004) observed that entrepreneurship development in Nnewi has four major trajectories: trading, private savings, private investment and manufacturing. The period between 1970 and 1980 was classified as capital accumulation period through private savings induced by reduced transaction cost. Transformation from trading to production started in 1982 with marketing of products with their brand name but produced in Taiwan. Success in such marketing method motivated the traders to venture into actual production. In other words, industrial revolution started at Nnewi in 1983 as a result of the competitive nature of the Nnewi entrepreneurs. It was observed that factors and skills responsible for success of one entrepreneur were easily copied and applied by other entrepreneurs. In order to reduce all kinds of transaction costs, most firms distribute their products through pre-existing distribution networks. Uzor (2004) argued that Nnewi clusters have moved from using hand tools to using modern technology in production and gradually adopting working culture similar to the western system of production.

Nnewi clusters have built learning network mainly to improve their performance through sharing of tools, cost of transaction of information, sharing of product design, sources of technology inputs and consumer demand. As a result, they enjoy stronger comparative advantage over



other isolated firms. Firms in Nnewi clusters are renowned for their international linkages with advanced economies like USA, Germany, Britain, Japan, Singapore, Malaysia and Italy. These linkages were developed through long term trade relations. The linkages were in two forms. First, as technical cooperation in order to overcome technological gap in production and management capabilities, the other is in form of outright purchase of entire factory from foreign partner after repeated trade transactions.

Challenges Confronting SME Cluster Formation and Growth In Nigeria In contrast to global trend of cluster development, Nigerian clusters have not been able to move beyond producing for local markets. This is basically attributed to neglect or ineffective policy design on one hand and absence of institutional and technological backing on the other hand. Schmitz (1995) asserted that most Nigerian clusters are weak in terms of collective efficiency. Indeed, externalities alone cannot sustain a cluster growth path because such gains were incidental by-product of some other firms. There is need to emphasise on deliberate actions needed to improve performance which is usually referred to as joint actions. Joint actions are some deliberate and strategic actions that do not oppose market competition but needed to sustain the growth of the cluster. The actions are deliberate and jointly pursued in order to strengthen growth and overcome market impediments.

Since cluster development constraints in Nigeria are exacerbated by non-market order behaviour. It is difficult for clusters to grow in an environment where civil and commercial laws are very weak, where there is political and macroeconomic instability, where there is corruption in public institutions, and where information about firms’ activities and market transactions are not documented. A situation where entrepreneurs rely on informal credits financing for their survival does not encourage SME cluster growth. Most formal credit institutions have been reluctant to service SMEs for a number of reasons. Abereyo and Fayomi (2005) stated that main reasons are firstly, SMEs are regarded as high-risk borrowers due to insufficient assets and low capitalization, vulnerability to market fluctuations and high mortality rate. Secondly, information asymmetry arising from SMEs lack of accounting records, inadequate financial statement or business plan makes if difficult to assess the creditworthiness of SME proposals. Thirdly, there is high administrative cost associated with servicing SMEs. Indeed, most Nigerian SMEs lack collateral securities for borrowing and so rely on rural loan transactions where the major collateral is the past performance of the borrower.

Oyeyinka (2001) posited that most entrepreneurs in Nnewi clusters have little knowledge of production skills and there is little or no cooperation with training institutions. Most lack management skill which is imperative in modern

production system because natural talent has limitations as production system becomes complex and competitive pressure increases. This implies that the level of education and quality of skilled workers limit Nigerian SMEs from growing beyond a certain level.

Another challenge confronting SME cluster development in Nigeria is the absence of vertical integration of firms along the production stages. It shows that the SMEs are mainly producing for the local market. Thus, the role of large firms in inter-firm cooperation is needed to help the SMEs upgrade production capabilities and enjoy economies of learning process. Also, there is a problem of importation of raw materials and minimal degree of local content in production as most of these SMEs rely on imported raw materials since there is no local substitute. This implies that there are little sectoral linkages in the clusters on the one side and absence of institutional linkages on the other.

Strategies for Strengthening SME Clusters Growth In NigeriaThe importance of SME clusters in Nigerian industrialization quest cannot be overemphasized. Studies on SMEs and entrepreneurship in Nigeria indicate that there are no effective institutions supporting cluster development. There is the need for partnership building between states, institutions and private sector for SME development. Vocational and skill acquisition centers should be upgraded and set up near these clusters. Government should not pay lip service to technical education and training but ensure availability of skilled and technically competent workforce. Metallurgical Training Institutes (MTI) technical training scheme in the country should be expanded to cover the grass root levels and linked up with these clusters.Furthermore, incentives should be given to these SMEs clusters in the form of opening new market opportunities and dismantling trade barriers that affect SME development negatively. This will not only increase their efficiently but position them to compete more effectively in a global world. Other forms of incentives include funding researches, implementing technical agreements, outsourcing, capacity building and favourable bilateral interventions directed towards engaging SMEs in effective joint venture activities with foreign SMEs. As a way of motivating these clusters, Chambers of Commerce and Industries should be repositioned to offer concrete support to these clusters. Also, citizens’ confidence on legal institutions should be restored in issues of handling contracts and transactions, and services of cluster supporting institutions should be strengthened.

Most importantly, venture capital option should be embraced. Venture capital involves the provision of investment finance to SMEs in the form of equity or quasi-equity instruments, not traded on recognized stock



exchange. According to Abereyo and Fayomi (2005), venture capital is a long-term risk finance where the primary returns to the investor is derived from capital gains rather that dividend income and also, venture capital investors are actively involved in the management of the enterprise where their money is invested. Venture capital is more appropriate for these clusters development because it does not require collateral from borrowers, has lower operating cost due to lower interest and availability of managerial know-how provided by venture capitalists. It is also of long term unlike short term loans from banks.

4. ConclusionSME cluster development has much potential to generate employment, alleviate poverty, industrialize Nigeria and bring about general socio-economic improvement. However, weak government, institutional weaknesses and various market failures limit the growth of these clusters. Expanding SME clusters and increasing their effectiveness demand that supporting institutions such as law courts, financial institutions, training institutions, public agencies and public utilities providers should be strengthened in order to offer friendly services to these clusters. Increasing competitiveness of Nigerian SME clusters in a contemporary world entails that there should be clear policy design and concrete action on the part of the government, private sector and the SMEs themselves.

ReferencesAbereyo. I and Fayomi. A (2005) Innovative Approach to

SME Financing in Nigeria: A Review of Small and Medium Industries Equity Investment Scheme. Journal of Social Science 11(3)

Anyanwuoch. R.A.I (2010) Fundamentals of Economics for Senior Secondary Schools. Africana First Publishers Limited.

Ariyo. D (2000) Small Firms are the Backbone of the Nigerian Economy. Africa Economics Analysis

Cawthorne, P. (1995).”Of Networks and Markets: The Rise of a South Indian Town: Tirrupur’s Cotton Knitwear Industry”, World Development. Vol. 23, No.1.

Elsner, W. (1998). An Industrial Policy Agenda 2000 And Beyond: Experience, Theory and Policy. Bremen Contributions to Institutional and Social-Economics (Eds.) Biesecker, A./ Elsner, W./ Grenzdörffer, K., No. 34.

Fafchamps, M. (1996). The Enforcement of Commercial Contracts in Ghana, in: WorldDevelopment, Vol. 24, No. 3. pp ( 427-448).

McCormick, D. (1997). Industrial District or Garment Ghetto?, Nairobi’s Mini-Manufacturing, in: M. P. van Dijk & R. Rabellotti: Enterprise Clusters and Networks in Developing countries, pp(109-130). Frank Cass, London.

McCormick, D. (1998). Enterprise Cluster in Africa: On the way to Industrialisation? IDS Discussion paper 366,

Sussex: IDS.Mitullah, W. V. (1999). Lake Victoria’s Nile Perch Fish

Cluster: Institutions, Politics and Joint Action, Brighton IDS Working Paper 87.

Nadvi, K. & Schmitz, H. (1999). Industrial clusters in developing countries, WorldDevelopment, vol. 27, No. 9 (Special Issue).

North, D. C. (1990). Institutions, Institutional change and economic performance, Cambridge:Cambridge University Press.

Olaitan, M.A (2006) Finance for Small and Meduim Enterprises: Nigeria’s Agricultural Credit Guarantee Scheme Fund.Journal of International Farm Management vol 3 No 2

Oyelaran-Oyeyinka, B. (2001). Networks and Linkages in African Manufacturing Cluster: ANigerian Case Study. The United Nations University, Discussion paper series#2001-5, Helsinki.

Pedersen, P. O. (1997). Clusters of Enterprises within Systems of Production and Distribution: Collective Efficiency and Transaction costs”. In: Enterprise Clusters and Networks in Developing countries, ed. M. P. van Dijk & R. Rabellotti, pp (11-29). Frank Cass, London.

Porter, M. (1998). “Clusters and the new Economics of Competition”, Harvard Business Review, Nov.-Dec. pp (77-90.)

Schmitz, H. (1992). ‘On the clustering of small firms’, in: IDS Bulletin, vol. 23, No. 3, July.

Schmitz, H. (1995). Collective Efficiency: Growth path for Small-scale Industry, in: The Journal of Development Studies, Vol. 31, No.4, pp (529-566).

Sengenberger, W. & Pyke, F. (1992). Industrial districts and Local Economic Regeneration, in: International Institute for Labour Studies, Geneva.

Steiner, M. &.Hartmann, C. (1998). Learning with Clusters: A case study from Upper Styria.In: Steiner, M. (ed.): Clusters and regional specialization - On geography, Technology and networks, European research in regional science, 8, pp. (211-225).

Uzor. O (2004) Small and Medium Scale Enterprises Cluster Development in Southeastern Region of Nigeria. Institute of World Economics and International Management, University of Bremen

*The author is a lecturer in the Department of Cooperative Economics and Management, Nnamdi Azikiwe University, Awka.


UNDERSTANDING QUEUING THEORY

Understanding Queuing Theory And Its Contributions To Modern Management Thought

Ngige Chigbo D.

IntroductionQueuing systems or waiting lines exist throughout society and their adequacy has strong effect on quality of service and productivity. Queuing theory is concerned with mathematical study of queues or waiting lines, formulating mathematical models of queues and measuring performance using these models.

A queue refers to the totality of customers or items waiting for service at a function. And whenever the rate of service is less than the rate of arrival (of persons, components, cars and parts) queue exists. Variety of situations encountered almost daily can be classified as queuing or waiting line situations. Cars waiting for fuel at petrol stations, patients waiting at clinics, students waiting to be served at campus refectories/canteens, items waiting to undergo some workshop processes, selling tickets in a booth, collecting tolls on a bridge, servicing bank customers by a teller, the checkout procedure in a supermarket are example of waiting line/queue situations.

In queuing situations, three things can happen. First, there may be a perfect match between the requirements of the customers and the capacities of the service facilities. In such a case, we do not have a queuing problem. Second, the relationship between the pattern of customer arrivals and the pattern of service rate may be such that the customers have to wait for service.

Third the relationship between the pattern of customer arrivals and service rate may be such that the service facilities have to wait or remain idle. In the latter two cases, a queuing is operative and we have a queuing problem (Ewurum, 2003:91). Generally a queuing or waiting line problem arises whenever the demand for customer service cannot perfectly be matched by a set of well defined service facilities. The perfect match cannot be achieved because, in many situations, neither the arrival times (or arrival rate) of the customers nor the service times (or service rate) of the service facilities can be accurately predicted (i.e both the customer arrivals and service times are random). Thus, either the customer have to wait for service

AbstractThis paper examines the concept of queuing theory and its historical development, the basic components of a queuing model, the operating characteristics of a queuing system/a simple waiting line model, assumptions and equations for describing the behaviour of a queuing model, queuing theory applications and thus offers suggestions, provide vital information to those who manage people. A queuing or waiting line problem arises whenever the demand for customer service cannot perfectly be matched by a set of well defined service facilities. The methodology for this study was mainly from secondary sources and materials were sourced from journals, textbooks, and the internet. Results show that queuing theory allows management to improve an existing queuing system; by helping them compare the costs of making work or customers wait in line against the costs of adding more facilities thereby identifying the optimal alternative that will minimize costs or maximize profits. Furthermore, knowledge of the operating characteristics of a queuing system can serve as serve guide to managers in designing a new queuing system that can equally minimize costs or maximize profits.

(i.e the queue emerges) or the service facilities have to wait (service facilities remain idle). Specific costs are associated with

a. The waiting of the customers and

b. The idle service facilities. These two categories of costs move in opposite directions. For example, by adding more service facilities, we decrease the cost of the customer waiting and increase the cost of idle facilities. Conversely, by decreasing the number of service facilities, we increase the cost of waiting but decrease the cost of idle facilities.

Modern management thought posits that the ideal situation does not mean that no one is waiting (Nair, 2002: chapter 9). The purpose of queuing theory therefore, is to help management analyze a situation and help design a system such that the sum of the costs of customer waiting and costs of idle facilities is at a minimum (i.e. total loss is minimum). A French mathematician S. D. Poisson (1781-1840) was the first to develop a viable queuing theory using the distribution function to describe the probability of a prescribed outcome after repeated iterations of independent trials (Ogbo, 2008: 14).

The most important application of queuing theory occurred during the late 1800s when telephone companies were faced with the problem of how many operator’s to place on duty at a given time. At the time, all calls were switched manually by an operator who physically connected a wire to a switchboard. Each customer required the operator only for the few seconds it took to relay directions and have the plug inserted and the time recorded. After the call was wet up, the operator was free to accept another call.

It is therefore pertinent and against this background that this paper aims to look at understanding queuing theory and its contributions to modern management thoughts.

2. The Components of a Queuing ModelA queuing system essentially consists of the following four components:



i. An input source of calling population that generates

customer.

ii. A service system that consists of one or more service

facilities. The channels of servers may be classified either

as single or multiple (Laufer, 1979: 180). If the system is a

single-channel waiting line the units arriving and forming

the queue have only one server available to them. A

physician treating patients in the office, is a typical

example. A medical clinic with more than a single doctor

to treat patients, a banking with more than one tellers

window available to cater for customers and a petrol

station with multiple fuel pumps are all examples of the

multiple-channel waiting-line case.

The clinic case is a single waiting line with multiple servers while the bank and petrol station cases are multiple waiting line conditions with multiple channels; if the waiting line priority is first come, first serve. However, one observational insight provided by comparing queuing models is that a single queue with multiple servers performs better than each server having their own queue by preventing line switching (Laufer, 1979: 180-181).iii. A queue that indicates the number of customers waiting for

service (the queue does not include the customers being served). Some customers may decide whether or not to join the queue due to the queue conditions. Others, are discouraged by the length of the queue and therefore do not join the line (balking), while certain others after waiting in the queue for some time, become impatient and drop out of the queue (reneging).

iv. A queue discipline or service discipline according to which the customers are selected for service. There is the first come, first served (FCFS) basis of discipline. Last in, first out (LIFO), which is based on some emergencies of some medical prioriting, is another system. Other priorty rules include; reservations first, highest profit customer first, largest orders first, shortest processing time (SPT) rule, random rule and priority rule (Ogbo, 2008:14; Nairs, 2002).

However, two major practical problems in using any rule exists: One is ensuring that customers know and follow the rule. The other is ensuring that a system exists to enable employees to manage the line (such as take a number system).

3. Operating characteristics of a Queuing system:The operating characteristics emerge as a result of interaction among the different components of a queuing system. Thus, the behaviour of a queuing system is described by such variables as arrival rate, waiting time in the queue, service time, idle time of service facilities, total time spent by a customer in the queuing system, and so on. We need to know the distributions of such variables, along with the numerical values of their means, standard deviations, and probability measures that the variable be less than or more than, certain specified numbers (e.g what is the probability that the waiting time is 10 minutes or less?). The operating characteristics of a queuing system refer to the values (i.e mean, standard

deviation, etc, of different variables) that are needed to either evaluate the performance of an existing queuing system or to design a new system. For example, while designing a new system, we may impose such specifications as: “The probability of the waiting time being 10 minutes or more should be less than 0.10.”

Examples of operating characteristics include; average waiting time in the queue, percentage idle time of service system, average arrival rate, average service rate, etc. The numerical values of various operating characteristics of an existing queuing system can be calculated either analytically (i.e by using mathematical equations relating to specific queuing models) or by simulation.

4. A simple waiting line model (Analytical Approach):The simplest form of the waiting line problem, which can be solved through the use of relatively uncomplicated equations (i.e by the analytical approach), is the single – channel, single- phase model/case. In this case, units arrive at the single –service facility, and require only one service activity before moving out of the system. A physician treating patients in the office is a typical example.

In the analytical approach, the arrival rates and service rates are represented by appropriate distributions. Mathematical equations are then developed from the queuing literature for the operating characteristics of the model under consideration. Calculations are then developed for the numerical values of the various operating characteristics of the queuing system (assuming that relevant parameters of the distributions are known). With this information, therefore, and provided we can estimate relevant costs, the queuing model can be used to identify the optimal alternative that will minimize costs or maximize profits.

4.1 Assumptions for Calculating the Numerical Values of the Various Operating CharacteristicsLaufer (1979:181-182) and (Ewurum 2003: 96) had specified various assumptions for calculating the operating characteristics of a queuing system. They include:i. An infinite waiting-line source exists. This means that the

size of the calling population is infinite.ii. The arrival rate follows the poisson distribution iii. There is no balking. This implies that arriving customers

always join the queue. iv. There is no reneging: This implies that customers stay in

line until served (i.e. patient customers).v. The queue discipline is first come, first served (FCFS)vi. The permissible length of the queue is infinite.vii. The service time distribution is approximated by an

exponential distribution.viii. The rate of service is greater than the rate of arrival (i.e. µ

>l). This is because if the arrival rate exceeds the average service rate, the system cannot achieve a steady state, because the waiting line will continuously grow larger.

4.2 Equations for Calculating the Numerical Values of the Various Operating Characteristics: Here, we present some of the commonly used equations for calculating the numerical values of the various operating characteristics of the single-channel, single-phase queuing



model. Although these equations differ from model to model, they are useful in describing the behaviour of all types of queuing models (Gupta and Hira, 2007: 998-9779; Ewurum, 2003: 97-78). However, before describing the equations, the following notation symbols will be used in connection with queuing models:n = number of customers in the system (waiting line + service

facility) at time t. = Mean arrival rate (average number of arrivals per unit of time) µ = mean service rate (average number of services/customer

served per unit of time). 1/ = Mean inter-arrival time (average time between

arrivals). 1/µ = Mean service time (average time between services).Pn = Steady state probability of exactly n customers

in the system.Lq = Mean (average) number of customers in the

queue. Ls = Mean (average number of customers in the entire

system (waiting plus being served).Wq = Mean (average) waiting time in the queue. Ws/TS = Expected time a customer spends in the system Ln = Expected number of customers waiting in line

excluding those times when the line is empty. Wn = Expected time a customer waits in line if he has to wait at

all.The Equations are as follows:1. The probability of a service facility being busy (traffic

intensity or utilization factor), P(Greek Letter rho) = µ/Since by assumption (viii) above, 0 < P < 1.

2. Probability of an empty idle system (percent idle time), P0 = 1 – probability of no of units in the queuing system = 1 – P = 1- /µ

3. Probability that there are n customers in the system, n nPn = P0 . ( /µ) = [1 - /µ] ( /µ)

4. Mean (average) number of customers in entire system. Ls = ( /µ- )

5. Mean (average/expected) number of customers in the queue,

2Lq = /µ .Ls = /µ . /µ- = /µ(µ- )6. Mean (average/expected) number of customers in non-

empty queue (length of queue that is expected from time to time) Ln = µ/µ-

7. Expected (average) time a customer spends in the system Ts or Ws = / µ-

8. Mean (average/expected) waiting time of customer in the queue, Wq = / µ . Ws = / µ . / µ- = / µ(µ- )

9. Expected (average) waiting time of a customer in non-empty queue (average waiting time of customer who has to wait). Wn = / µ-

10. Probability of queue length being greater than or equal to n.

nP(> n) = ( / µ)

Theory Applications

5. QueuingIn its broadest sense, queuing theory is concerned with mathematical study of queues or waiting lines, formulating mathematical models of queues and measuring performance using these models. It is thus comprised of models and formulas that describe the relationships between service requests, congestions, and delay.

Queuing networks have been applied to reduce waiting times in hospitals, and to analyze the performance of computational system (Wikipedia, 2008). It may also be extended to cover a wide variety of contentious situation, such as how many calls a telephone switch can handle, how many computers can share a mainframe, and how many doors an office building should have. More generally, queuing theory is used is business settings primarily in operations management and research p r o b l e m s s u c h a s p r o d u c t i o n s c h e d u l i n g a n d logistics/distribution.

6. Conclusion Queuing theory allows management to improve an existing queuing system. Thus, it helps managers to compare the costs of making work or customers wait in line against the costs of adding more facilities; thereby identifying the optimal alternative that will minimize costs or maximize profits.

Moreover, a knowledge of the operating characteristics of a queuing system can serve as guide to managers in designing a new queuing system that can equally minimize costs or maximize profits. In other words, a knowledge of the costs associated with customer/machine idle time coupled with the information generated by queuing can help managers make decisions on such things as physical facilities mechanisms, service levels, and measure of system effectiveness.

References Ewurum, U.J.F, (2003), Module on Operations Research,

Enugu: Precision Printers and PublishersGupta, P. K. and Hira, D. S. (2007), Problems in Operations

Research: Principles and Solutions, New Delhi: S. Chand and Company Ltd.

Laufer, A. C. (1979), Operations Management, Cincinnati Ohio: South Western Publishing Company.

Nair, N. G. (2002), Resource Management, New Delhi: Vikas Publishing House PVT Ltd.

Ogbo, A. (2008), “The Contribution of Queuing theory to Modern Management Thoughts,” in Management in Nigeria, vol 44. No. 3, July – September.

Sridhar, M. S. (2009), Waiting Lines and Customer Satisfaction, http://www.Scribd.com/doc/983308/waitinglines-and-customer-satisfaction.

W i k i p e d i a ( 2 0 0 8 ) , Q u e u i n g T h e o r y , http://en/Wikipedia.org/wiki/QueuingTheory

*The author is a lecturer at the Department of Business Administration, Anambra State University, Igbariam Campus.

Certified National Accountant JANUARY - MARCH, 2011

A Study Of The Application Of Queuing Model In First Bank Of Nigeria Plc Onitsha To Improving Service Delivery

Onyeizugbe Chinedu U.

AbstractThis paper is an empirical study of the applicability of queuing model in First bank of Nigeria Plc, Onitsha aimed at identifying the features of a queuing system, identifying the causes of long queues and assessing the effects of the long queues on the service delivery of the bank. Data collected were presented in tables and analyzed using descriptive statistical measures. It was found that long queues in First Bank of Nigeria Plc, can result to customer dissatisfaction and economic losses to the bank. It is recommended that First bank of Nigeria PLC, Onitsha should use the principle of multiple channels to diversify their operation bases, single queue with multiple servers, training workers to be friendly, take a long-perspective toward getting rid of the queues for enhanced service delivery.

IntroductionThe concept of providing and receiving services is inherent in today’s specialized and interdependent world. Indeed, one of the most common phenomenon of modern life is that customers requiring service arrive at a set of service facilities that provide services. If upon arrival, the service facilities are free, the customers are provided service without delay or waiting. However, if the service facilities are not free, the customers either wait in a queue (waiting line) to receive their turn for service or they get discouraged by seeing the length of the line and decide not to join the line.

In queuing situations three things can happen. First, there may be a perfect match between requirements of the customers and the capacities of the service facilities. In such a case, we do not have a queuing problem. Second, the relationship between the pattern of customer arrivals and pattern of service rate may be such that customers have to wait for service. Third, the relationship between the pattern of customer arrivals and service rate may be such that the service facilities have to wait or remain idle. In the latter two cases, queuing is operative and we have a queueing problem.

In general, a queuing or waiting line problem arises, whenever the demand for customer service cannot perfectly be matched by a set of well – defined service facilities. The queuing model attempts to determine the number of servers that strike an optimal balance between the time customers wait for service and cost of providing service. Queuing models attempt to formulate, interpret and predict for the better understanding of queues and provide solutions that are capable of influencing arrival pattern of customers or determine the optimal number of service facilities (Kalvathy, 2002). The consequences of long queues in Nigerian banks are increasingly customer dissatisfaction and poor service delivery. The application of queuing models will improve service delivery especially in First Bank of Nigeria Plc, Bridge Head Branch, Onitsha which will be our scope of study.

Obviously the long queues noticed at various public utilities in

Nigeria smirks off negative comments in the society. This is even more painful at some of our banks which are the livewires of the economy. It is very common to find long stretch of human beings and even cars at First Bank Bridge Head Branch, Onitsha especially during network failure of the computer system. Many customers become frustrated and may decide to go to another bank for a better service delivery. The management of the bank has not done enough to reduce to the barest minimum the sufferings of the customers. To this end, an empirical study of the applicability of queuing models aimed at improving service delivery in the bank is pertinent.

In this regard, this study attempts to find out: * The causes of long queues in First Bank Bridge Head Branch, Onitsha* The consequences of long queues in First Bank Bridge Head

Branch, Onitsha* The possible solutions to long queues in First Bank Bridge

Head Branch, Onitsha .

Review of Related LiteratureMartand (2007: 497) states that queuing theory also called waiting line theory was developed by A.K Erlangs. The theory owes its development to his efforts to analyze telephone traffic congestion with a view to satisfying the high demand for services of the Copenhagen automatic telephone system in the year 1909. According to the free encyclopedia (Wilkipedia) in queuing theory, a queuing model is used to approximate a real queuing situation or system, so the queuing behavior can be analyzed mathematically. Queuing models allow a number of useful steady state performance measures to be determined, including:· The average number in the queue, or the system.· The average time spent in the queue, or the system.· The statistical distribution of those numbers or times.· The probability of finding the system in a particular state.

A waiting line or a queuing problem is one where units of some sort – human beings or physical entities, arrive at an entrance point into the system, are processed in some way within the

STUDY OF QUEUING MODEL

50 51 JANUARY - MARCH, 2011Certified National Accountant


system and then depart from the system. If the entrances or processing are not specifically scheduled, but are random in nature, a waiting line or a queue can develop, if either the entrances (arrival) or processing (servicing) can be expressed as a probability distribution, the system can be represented by means of a queuing or waiting line model. Queuing or waiting line problems are found mostly in banks where customers are served by a teller, airport, gasoline stations, hospitals, government ministries, departments and agencies, etc.

A queuing or waiting line problem arises whenever the demand for customer service cannot perfectly be matched by a set of well – defined service facilities (Ewurum, 2003). The perfect match cannot be achieved because, in many situations, neither the arrival times (or arrival rate) of the customers nor the service facilities can be accurately predicted (both the customer arrivals and service times are random). Therefore, either the customer have to wait for service (the queue emerges, or the service facilities have to wait, service facilities remain idle). In this regard, specific costs are associated with the waiting of the customers and idle facilities. These categories of costs move in opposite directions. For example, by adding more service facilities, we decrease cost of customer waiting and increase the cost of idle facilities. Conversely, by decreasing the number of service facilities, we increase the cost of waiting but decrease the cost of idle facilities. The purpose of the queuing model is therefore to help design a system that will minimize a stated measure of performance such as the sum of costs of a customer waiting and costs of idle facilities.

Queue therefore is the totality of items waiting for service at a function. In every day situation queues abound. A typical example is a customer in a particular bank may be served immediately or may have to wait for previous customers to be served. Most customers would naturally like to be served immediately which would imply that there should always be empty desks with cashiers awaiting customers. The bank manager, on the other hand, would like to have his cashiers busy all the time. There could be conflict because customers do not arrive at the desks at fixed and regular intervals, and some take longer time to be served than others. If a cashier is kept fully occupied, a queue will develop at the desks when customers arrive more frequently than usual, or take longer time than usual to be served. Customers may decide to bank elsewhere. For this reason, the manager would then have to consider employing a new cashier. Obviously this should reduce the customer’s waiting times and cut down the queue length, but at the same time it will add to his costs. The manager, in deciding whether to pay for one or more extra cashiers, will want to know the consequential effects on both the average waiting time and the queue length.

Features of a queuing system The basic features of a queuing problem are some form of input of units requiring some kind of service which may not always be immediately available. In such case, a waiting line will be formed such that when a unit has been serviced it leaves, forming the output of the queuing system. A queue

problem arises because of the irregularity of the rate of input or of service, or both, so that input and service cannot be matched arithmetically (Ogbo, 2009). If a cashier in a bank always takes exactly 20 seconds to deal with a customer and a customer arrives every 20 seconds precisely, then there would be no queue. Invariably, the cashier would be 100% occupied. The system could then be said to be 100% effective. Subsequently if the time taken by the cashier to deal with each customer were reduced from exactly 20 seconds to exactly 18 seconds and the customers still arrived at 20 seconds interval, then whilst there would still be no queue, the cashier would only be 90% occupied. Modern management thought posits that the ideal situation is not necessarily one where all queens are eliminated. For this would mean enormous idle time amongst the service facilities.

Rather, a balance must be struck between costs of queues and costs of extra servicing facilities. In general, queuing theory attempts to determine the member of servers that strike an optional balance between the time customers wait for services and cost of providing service. Queuing theory is the construction of mathematics mode of various types of queuing systems so that predictions may be made about how the system will cope with demand made upon it (Lucey, 1989). This definition however is based on the assumption that all queuing systems are amenable to queuing theory. A French mathematician S.D. Poisson (1781 - 1840) was the first to develop a viable queuing theory using distribution function to describe the probability of a prescribed outcome after repeated iterations of independent traits. The statistical approach could be applied to any situation where excessive demands are made on a limited resource.

Source: Fig 1 Ogbo, A. (2009) the Contributions of Queuing Theory to Modern Management Thoughts, Journal of Nigeria Institute of Management.

Queuing System ComponentsAny queuing system has four components (Enwurum, 2003):i. An input source or calling population that generate

customer.ii. A service system that consists of one or more service

facilities.iii. A queue that indicates the number of customers waiting for

service (the queue does not include the customers being served). When the customers arrive at the service facilities, they examine the queue conditions and decide whether or not to join the queue. Some customers are discouraged by the length of the queue and therefore do not join the line (this is known as balking). Some customers, after waiting in the queue for sometime, become impatient and drop out of the queue (this is known as reneging).

iv. A queue discipline or service discipline is the decision rule for service.

Queuing System FactorsOgbo (2009) identifies some factors that affect queuing system. They are:



1. Number of lines: A single line or single file is indeed one line only. The term multiple lines refer to the single line that form in front of two or more servers or to single lines that coverage at some central redistribution point.

2. Queue Discipline: A queue discipline is a priority rule or set of rules for determining the order of service to customer in a waiting line. The rule selected can have a dramatic effect on the systems overall performance. The number of customers in line, the average waiting time, the range of variability in waiting time and the efficiency of the service facility are some factors that could affect the choice of priority rules. Probably, the most common priority rule is First Come, First Served (FCFS). This rule states that the customers in line are served on the basis of their chronological arrival; no other characteristics have any bearing on the selection process. This is popularly accepted as the fairest rule. In practice, it discriminates against the arrival requiring a short service time.

Fig 2: Queuing Discipline

CustomersLeaveBank

Cash Desk

Channel 1

Channel 2

Customers

Arriving

CashDesks

Waiting

QueueFor

Channel 3Output

Fig. 1: Basic Queuing situation showing input

Source: Fig 2: Ogbo, A (2009) the Contributions of Queuing Theory to Modern Management Thoughts Journal of Nigerian Institute of Management.

3. Service Time Distribution: This is the time the customer or unit spends with the server once the servicing has started. Waiting line formula generally specify service rate as the capacity of the service number of units per time period (such as 12 completions per hour) and not as service time, which might averagely be five minutes each. A constant service time rule states that each service takes exactly the same time.

As in constant intervals, these characteristics are generally

limited to machine controlled operations. When service times are random, they can be approximated by the exponential distribution.4. Line structures: It exhibits the flow of items to be

served, which may go through a single line, multiple lines or some mixtures of the two.

A single – channel single – phase model (Analytical approach): In this approach, we represent the rates and service rates by appropriate distributions. Then we develop or retrieve from the queuing literature, Mathematical equations for the operating characteristics of the model under consideration, we then calculate the numerical values of various operating characteristics of the queuing system (assuming the relevant parameter of the distribution are known). With this information in hand, the queuing model can be used to identify the optimal alternative that will minimize costs or maximize profits.Assumptions:

· The size of the calling population is infinite.· The arrival rate of the distribution is approximated by a

Poisson distribution.· There is no balking. The assumption implies that

arriving customers always join the queue.· There is no reneging. This assumption implies that

customer stay in line until served.· The queue discipline is first come, first served (FCFS).· The permissible length of the queue is infinite.· The service time distribution is approximated by an

exponential distribution.The rate of service is greater than the rate of arrival (i.e.µ > 8).



Operation Characteristics Of Single-channel Single- Phase Queuing ModelAlthough the equation or formula for calculating the numerical value of these operation characteristics differ from model to model, they are useful in describing the behavior of all types of queuing model (Ewurum, 2003).

1· Mean (average) inter arrival time = /1· Mean (average) service time = /µ

· Mean (average) service rate = µ · Utilization factor, P (probability of service facility being

busy) P = /µ· Since by assumption O < P < I· Percent idle time, 1 = probability of no of units in the

queuing system = 1- /µ · Mean (average) number of customers in the queue Lq = µ(µ - )

· Mean (average) waiting time in the queue wq = µ(µ - )· Mean (average) number of customers in the entire system (waiting plus those being served) Ls = (µ - )· mean (average) time per customer in the entire system

1(waiting time plus service time) Ts = /µ-· probability of n units in the entire

nsystem = Pn = ( 1- / µ) ( / µ)We can deserve 1 that is 1 = 1- / µ

IllustrationThe First Bank of Nigeria PLC is opening a new suburban branch. Based on preliminary research, it is assumed that customer arrival rate can be approximated by a Poisson distribution, with an average arrival rate of 10 customers/ hour. The bank is planning to employ only one teller, and it is assumed that the teller can serve on the average 12 customers/hour. It is assumed that the service rate distribution is also Poisson. Our task is to analyze this queuing system by calculating the numerical values of these operating characteristics.

Solution: We know from the problem description that:1. average arrival rate 10 per hour. Hence 1/ average inter

arrival time

First Come, First Served

Shortest Processing

Reservation First

Emergencies First

Limited Needs

Others

Queue Discipline

1 hour 10 = 6 hours

2. µ average service rate 12 per hour. Hence 1/µ average service time 1 hour

12 = 5 minutes3. Utilization factor /µ =10/12 = 0.833. That is, the teller is

busy 83.33 percent of the time (hence, he is idle 16.67 percent of the time).

4. Percent idle time 1-P= 1-0.8333= 0.1667.

1225. Lq = X = 10 = 100 = 4 /6

µ(µ - ) 12(12-10) 12That is, on the average, 4 customers will be waiting in the queue for service.6. Wq = = 10 = 5 = 25 minutes µ(µ - ) 12(12-10) 12 That is, on the average, a customer will wait in the queue for 25 minutes.

Causes Of Long Queues In Nigerian BanksThe causes of long queues in Nigerian banks can be attributed to network failure of the computer system. Most banks operate on a centralized information system where information are processed centrally from the headquarters and then disseminated to the various branches. If there is any breakdown or failure from the headquarters where the information is controlled, it will affect the branches, slowing down operation causing long queues in the banking halls (service time distribution is increased).

Another cause of long queues in the Nigerian Banks is a random queue discipline that reflects a service system not operated in a well organized manner. A queue discipline is a priority rule or set of rules for determining the order of service to customers in a waiting line.

Attitude of the workers or employees especially those serving directly the customers. Some of these workers are very slow in rendering services to the waiting customers. They may leave those customers waiting in line and be attending or working on other activities (Ogbo, 2009).

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Shortage of manpower in the banks can also cause queue. Long holidays can cause long queues in the banks in the next working day, because the customers will rush to the banks to carryout the business not done during the holiday.

The Consequences Of Long Queues In Nigerian BanksThe consequences or problems caused by queuing situation are often related to customer dissatisfaction with service or may be the root cause of economic losses in business (Ogbo, 2009).

Reneging is another consequence of long queues in Nigerian banks; a customer waiting in a queue may decide to forgo the service because he does not wish to wait any longer.

The probability that a customer reneges usually increases with the queue length and the customer’s estimate of how long he must wait to be served (Ewurum, 2003). In systems where demand exceeds server capacity, reneging is the only way that a system attains a state of dysfunctional equilibrium (Hall, 2006). Long queues can create a problem of balking in the banks, the customers here do not even join the queue, once they see the queue, and they leave the bank immediately (Ogbo, 2009).All these will impact negatively on the service delivery by the banks making them loose their customers.

MethodologyThis is a survey research in which First Bank of Nigeria PLC, Bridge Head Branch, Onitsha is used. Employees of the bank are made up of population study of forty (40). They include the Manager, Head of marketing (marketers and other employees under them), Head of operations (Accountants, cashiers, customer service officers and other employees under them).

Population Of The Study, Sample Size And Sampling Technique A sample size of thirty six (36) respondents was determined using Yamane’s (1964) formula, Stratified random sampling technique was the method used in the process of selecting the respondents for the study. However as a result of the problem usually associated with the questionnaire method of data collection, a total of thirty (30) properly completed questionnaire (out of thirty six (36) distributed were returned and used for analysis. This represents 83.3% of the administered questionnaire Statistical techniques such as frequencies and percentages are used to analyze data.

Data Presentation And AnalysisTable 1: Sex distribution of respondents in First Bank of Nigeria PLC, Bridge Head Branch, Onitsha.

Sex Frequency Percentage (%)Male 10 33.33Female 20 66.67

30 100.00

Table 2: Network failure of the computer system has always caused long queues in the bank.

SEX SA A UN D SD TOTALMALE 2 6 1 0 1 10FEMALE 10 2 4 3 1 20TOTAL 12 8 5 3 2 30

Table 3: Long queues experienced in our bank to lack of manpower


Table 4: Long holidays have been one of the causes of long queues in our bank.


Table 5: Bad attitude of both the customers and employees had led to the long queues in the bank.


Table 6: Customer dissatisfaction has been the resultant effect of long queues in the bank.


Table 7: Long queues has caused a great economic loss to the bank


Table 8: Long queues have always resulted to chaos and confusion in the bank


FindingsHaving presented, analyzed and interpreted the data obtained in the course of this research work, the following are identified as major findings of this research effort:* One of the major causes of long queues in First Bank of



Nigeria Plc, Bridge Head Branch is network failure of the computer system.

* The bank has not employed enough workers to man various service points.

* Long holidays, bad attitude of both customers and workers have caused long queues in the bank. The random queue indiscipline is always caused by both the customer and the workers. If the entrances or processing are not specifically scheduled, but are random in nature, a waiting line or a queue can develop.

* The major consequences / efforts of long queues on the bank are increasing customer dissatisfaction, economic loss, chaos and confusion.

RecommendationsBased on the findings, the following recommendations are made to improve service delivery in First Bank of Nigeria Plc, Bridge Head Branch Onitsha.i. The bank should use the principle of multiple

channels to diversify their operation bases. This should be done by increasing its service points.

ii. The use of a single queue with multiple servers should be adopted by the bank for further utilization of the multiple service points.

iii. The bank should determine an acceptable waiting time for its customers especially on how long a customer is expected to wait.

iv. Recruiting and training more workers to be friendly can go a long way toward overcoming negative feeling of a long wait.

v. The management should device strategies for diverting customer’s attention when waiting such as providing music, a video or some other form of entertainment.

vi. The management should improve effectiveness and efficiency in the Data processing unit at the headquarters.

vii. The manager should always inform the customers of what to expect. This is especially important when the waiting line will be longer than normal.Also inform them what the management is doing to alleviate the suffering.

viii. The manager should always keep employees not serving the customers out of sight as nothing is more frustrating to someone waiting in line to see a worker who is supposed to serve him working on other activities.

ix. The management should take a long perspective toward getting rid of the queue. They should develop plans to serve the customers

x. Segment the customers: If a group of customers

need something that can be done very quickly, give them a special line so that they so not have to wait for the slower customer.

If all these recommendations are put in place by the bank it will go a long way towards improving service delivery to its customers.

ReferencesBooksHall, R.W. (1991). Queuing Methods: For Service and Manufacturing. New Jersey: Practice Hall, 327P.

Kalavathy, S. (2000). Operations Research. Delhi: Vita Publishing, 230P.

Lucey, T. (1989). Quantitative Techniques: An Instructional Manual. Great Britain: Guemsey Press Company Limited, 210P.

Monks, J. (1987). Operations Management Theory and Problem. New York: McGrew Hill International, 415P.

Oga, C.C. (2006). Production Management: A Quantitative Approach, 289P.

Ogbo, A. (2009). The contributions of Queuing Models to Modern Management Thoughts. Journal of Nigerian Institute of Management, PP.14-20.

Ewurum, U.J.F. (2003). Module on Man 534, Operations Research for the Degree of Master in Business Administration. Enugu: Precision Printers and Publishers.

*The author is a lecturer at the Department of Business Administration, Tansian University, Oba Anambra State.


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