THE IMPACT OF BENCHMARKING ONCOMMERCAL BANKS’PROFITABILITY

ABSTRACT

The study “is on the effect of Benchmarking on the Profitability of banks, a case study of First Bank of Nigeria Plc and Fidelity Bank Plc, Lagos area, investigated banks’ constant search of ways and means to improve their operational performance and profitability. It stated major problems of benchmarking in the banking industry to include, inability of banks to device a formidable synergy to achieving landmark success in benchmarking process for profit objectives and inability of benchmarking to arouse and sustain growth . The study’s main objectives include, inter alia, to x-ray how banks use formal process of benchmarking to improve performance, to highlight some of the challenges associated with benchmarking , to examine the performance of benchmarking on corporate performance of banks and to examine the objectives of benchmarking among banks. The researcher prepared a questionnaire to aid him collate primary data from respondents. Books, journals, periodicals and internet, were some secondary sources of data. However, the researcher, in his findings, observed that most banks use formal process of benchmarking to improve performance, that effective implementation of benchmarking process positively effects profitability and that increase in profit performance of banks enhances their benchmarking process. From the above findings, the researcher concluded thus; that favourable attributes of benchmarking on banks profitability is supposed to be sustained by readdressing the unfavourable in the achievement of other major objectives of banks and that the issue of benchmarking and banks’ profitability are interrelated strategies  sustainable  development  and  growth of banking  industry in  Nigeria.    He however, recommended thus; banks using formal process of benchmarking to improve performance should be supported with organizational resources for the realization of predetermined corporate goals.

CHAPTER ONE INTRODUCTION

1.2      BACKGROUND OF THE STUDY

The subject of discovering the best performance being achieved whether in an organization by a competitor or by an industry in the 21st century strategy needed to gain competitive edge in an increasingly globalised business environment. Sequel to fierce competitions that ensued in the banking industry before recapitalization and consolidation as well as banks distress and failure, it became the preoccupation of – Central Bank of Nigeria, to sanitize and control activities of banks in a survival strategy of merger and acquisition of banks. Banks after recapitalization and consolidation are constantly in search of ways and means to improve their operational performance and profitability. This is because operational performance has a high relevance for banks and leads to increase  profitability.    However  it  is  worthy  of  note  that  in  banking,  significant differences with regard to operational performance can be identified since operational performance is strongly linked to processes and the way they are designed and executed. (Akingbola, 2001). An attempt at correcting inefficiencies in banks (i.e. performance gap

in comparison to the best   practice) make   for   the adoption of   two distinct ways of closing  performance gap ;

Firstly, the process flow that can change and design related inefficiencies in resource commitment. This means that a process can be improved upon through changing its structure  and  design.  Secondly,  intrinsic  inefficiencies  that  can  be  eliminated  by improving the quality of manual and automatic processing activities that can be reduced by adjusting the execution quality to a best practice level, (Akingbola, 2001). Thus, the first  noticeable trend  in the  sector  is  bank’s quest  for administrative structures that encourage quality service delivery, expanded marketing to winning new customers and retaining the existing ones in a lower cost and effective synergies, hence the need of banks surviving policies through benchmarking.   At  this,  benchmarking serves as a

management’s guide to creating a competitive advantage in a highly competitive industry and environment especially in satisfying customer’s expectations and market share. Benchmarking  is  an  improvement  tool  which  an  organization  uses  to  measure  its performance or process against other organizations’ best practices determines how those organizations achieved their performance levels and uses this information to improve its own performance.

In effect, benchmarking when considered as a competitive edge by an organization could assist her sustainable development and growth.According to Roger (1999:203) benchmarking is not all about performance but cooperation of studied partners as well as process and practices. To him, the three types of benchmarking are metric, diagnostic and process. The   metric benchmarking provides   indications of relative performance and perhaps identifies leading competitors, but it is  unlikely to yield any ideas  on how to change, diagnostic benchmarking helps firms to identify and transfer improvement  into their operations and strategies. While process benchmarking is the most involving form of benchmarking, it is where the most substantial benefits can be found. This includes operational, functional and generic benchmarking. One thing clear about benchmarking is that it encourages competition, which leads to varieties in goods and services as well as desired standards. Following differences in circumstances in other industries, benchmarking often results in creative imitation and the adoption of new practices that overcome previous industry barrier.

To Oakland (2003), benefits in benchmarking are specially those of targets, priorities and operations that will lead to competitive advantages in products and among organizations. The efforts usually are realized in a search for best practices, those that lead to superior performance, through measuring performance, continuously implementing change and emulating the best. Similarly, benchmarking is useful for; understanding competition, ideas  from  proven  practices,  many  options,  superior  performance  market  reality,

objective evaluation, credible proactive, solving real problems and understanding outputs based on industry best practices. In the banking industry, benchmarking to Nwadibia (2001: ) has improved service delivery through banks.  In other words, benchmarking in banks as a process of wanting to retain confidence of customers on their deposits has been beneficial as tools to banks in improving on their benefits. Aside from this, banks are expected to regularly provide quality services using the continuous improvement cycle in the entire operating department where no body should be exempted. This study therefore accepts that benchmarking when appropriately administered promotes a climate for change by allowing employees to gain an understanding of their performance what they are achieving now and how they compare to others in order that they become aware of what they could achieve.

1.3 STATEMENT OF THE PROBLEM

Development and improvement in the banking industry has been a lot of concern to the stakeholders globally.  Every day,  each bank  try to  device a  better  way of offering services to the public that is very unique. At the same time the competitors in the industry try to do exactly the same but in a different and betterway, this is to ensure customer retention  and  new  customer’s  attraction  for  the  profitability  and  continuity  of  the business. This brought the issue of benchmarking. In Nigeria as it is been practiced, benchmarking had been faced with a lot of challenges that most banks and some other organization find it seriously difficult and sees it herculean task some of the challenges are as follows:

1.         Banks’ frameworks and competitions which limit the essence of benchmarking process in the industry.

2.          Inability of banks to streamline and fashion out ways of exploring and managing benchmarking process that will win, sustain customers and increase capital that will make them possess competitive edge, necessary for increased profitability.

3.         Inability of benchmarking to provide the expected stimulus necessary to launch banks into the realm of significant productivity and profitability in the financial industry.

4.         Inability of benchmarking to arouse and sustain growth and create values for all stakeholders in the banking industry.

5.         Inability of banks to device a formidable synergy for achieving landmark success in benchmarking process for profit objectives.

1.3  THE OBJECTIVES OF THE STUDY

The main purpose of this study is to examine the impact of benchmarking on profitability ofFidelity Bank and First bank of Nigeria Plc. in Lagos state as a case study.

The specific objectives of the study are;

1.        To x-ray the inherent handicaps of banks’ framework and competition which limit the essence of benchmarking process in the industry?

2.        To  highlight  why  banks  are  unable  to  streamline  and  fashion  out  ways  of exploring and managing benchmarking process that will win, sustain customers and increased profitability.

3.        To  determine why benchmarking in unable to provide the expected stimulus necessary to launch banks into the realm of productivity and profitability in the financial industry.

4.        To examine why benchmarking is unable to arouse and sustain growth and create values for all stakeholders in the banking industry.

5.        To determine why banks are unable to device a formidable synergy to achieving landmark success in benchmarking process for profit objectives.

1.4      RESEARCH QUESTIONS

(1)       What are the inherent handicaps of banks’ frame work and competition which limit the essence of benchmarking process in the industry?

(2)       Why are  banks unable to  streamline and  fashion out  ways of exploring and managing benchmarking process that will win, sustain customers and increase capital that will make them competitive edge, necessary for increase profitability?

(3)         Why is  benchmarking unable to provide the expected stimulus necessary to launch banks into the realm of significant productivity and profitability in the financial industry?

(4)       Why is benchmarking unable to arouse and sustain growth and create value for all stakeholders in the banking industry?

(5)       Why are banks unable to device a formidable synergy to achieving landmark success in benchmarking process for profit objectives?

1.5      RESEARCH HYPOTHESES

The following research hypotheses were formulated to guide this study;

ONE

H0:    Most banks do not use formal process of benchmarking to improve performance.

H1:    Most banks use formal process of benchmarking to improve performance.

TWO

H0:      Lack of access to information about the internal process of competitor banks is not a major hindrance to process benchmarking among banks.

H1:       Lack of access to information about the internal process of competitor banks is a major hindrance to process benchmarking among banks.

THREE

H0:   Effective implementation of benchmarking process do not affect banks profitability H1:   Effective implementation of benchmarking process affects banks profitability FOUR

H0:     There is no relationship between benchmarking and increase in profit performance of banks.

H1:       There is a relationship between benchmarking and increase in profit performance

of banks.

FIVE

H0:   Increase in profit performance of banks do not enhance their benchmarking process

H1:  Increase in profit performance of banks enhance their benchmarking process

1.6      SIGNIFICANCE OF THE STUDY

This research work is essentially significant to the following groups:

(1)     Banking  Industry:  TheNigerian  banks  and  other  players  in  the  sector  will explore the findings of this study as inputs for planning and formulating relevant policies and programes concerning their operations especially those ones that have to do with benchmarking. The essence of which is to enhance productivity

(2)     Academic Community: This scholarly research endeavour would add to the available data and knowledge on the topic understudy for reference purposes especially, for future researchers on the same topic.

(3)     The Public: This research will also be significant to individuals and general public as in the ways and means of enhancing healthy imitations from rivalry.

1.7      SCOPE OF THE STUDY

The research focuses     on benchmarking for profitability in the commercial banking industry of Nigeria with particular reference to two banks namely; Fidelity BankPlc and First bank Plc within Lagos State.  It is important to note that this study will be narrowed to the period of post consolidation era of Nigeria Financial System beginning from 2005 till date.

1.8 LIMITATIONS OF THE STUDY

The main limitation of this research is divided into three parts.

Time Constraint

The research was a bit hindered by the time frame required to complete the work, but this challenge was overcome by the researcher devoting more of his time to the work to ensure that the research is concluded on time..

Attitude of the Respondents

Some of therespondents were unwilling to cooperate with the researcher because they have nothing to benefit from the study financially and otherwise.

Finance

To carry out the work, the researcher needs some cash to move from one place to another to source for information, when all the needed cash is not available it limits the quality of information obtained.

1.9 PROFILES OF ORGANISATION UNDER REVIEW

1.9.1 Historical Background of First Bank of Nigeria Plc

The Bank was founded in 1894to cater to different sets of customers; the colonial trading companies and also the citizens of the colonies. The bank’s mission originally focused on promoting currency use. According to the founder, the use of barter promoted a wide variety of medium of exchange without uniformity, leading to moral excess. A bank would guarantee security, and also a uniform standard of exchange. However, to many the bank was originally created as an institution to guarantee the financial security of British shipping and trading agencies in Nigeria.

The founder Alfred Lewis Jones was a shipping magnate who originally had a monopoly on importing silver currency into West Africa through Elder Dempster. The bank acted initially as a financial security company meant to promote the use of silver currency and hence trading mostly in benefit of foreign goods. It did little lending to citizens but

actually depended on the finances of citizens for deposits who had little collateral so it was hampered in its duties a financial bank.

After Nigeria’s independence the bank’s official outlook began to change. It had to treat its main customers better. A major initiative of the bank was to change its name from the Bank of British West Africa to the Bank of West Africa. The bank later merged with Standard  Bank  and  was  called  Standard  Bank  of  West  Africa.  In  1969,  it  was incorporated in Nigeria and called Standard bank of Nigeria.   In 1979, after the government acquired shares in major expatriate banks, it was renamed First Bank. By then, the bank had re-organized it structure and had more indigenous directors than ever. After independence the bank also began to extend more credit to its main customers. Also, more citizens began to trust British banks since they there was an ‘independent’ financial control mechanism and more citizens began to patronize the new Bank of West

1.9.2   Historical Background of Fidelity Bank Nigeria Plc

Fidelity bank plc began operation in 1998,as a merchant bank. In 1999 it converted to commercial banking and then became a universal bank in February 2001.The current enlarged fidelity bank is a result of merger with the former FSB International Bank plc and many bank PLC(under the fidelity brand name)in December 2005

Over the years, the bank has been reputed for integrity and professionalism. It is also respected for stability and quality of its management.

Fidelity staff are also respected in the Nigerian banking industry for the training they receive on the job as well as in good business schools both in nigerain and overseas .The management is particular about the quality of people that join the system.To qualify as a member of the team fidelity candidate is expected to possess three vital statistics:

1.        Talent (an inmate mental aptitude)

2.        Ambition (a desire to success)

3.        Character (a total quality on integrity which will guide the talent)

The management is focused on building and maintaining a virile and well respected brand that  caters for the  needs of its growing  corporate, commercial and consumer clientele. For this purpose, the bank is leveraging its pedigree in investment banking. Fidelity bank also enjoy the respect and partnership of a network of off-shore institutions which it has correspondent banking, confirmation lines credit and other relationships. These include ANZ London,Afri-eximbank,cairo Egypt ABS south Africa, commerce bank,Frankfruit,Citibank,N,A      London      and       new       York       ,FBN       BANK UK.ltdSCB,London,HSBC,US,Ex-im BANK,USAID,ETC.

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