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BOARD OF DIRECTORS’ INDEPENDENCE ON BANKRUPTCY 

RISK OF DEPOSIT MONEY BANKS IN NIGERIA 

 
Okeke Onyekachi Nathaniel and Akaegbobi Tochukwu Nkem 

Department of Accountancy Nnamdi Azikiwe University Awka. 

Email; on.okeke@unizik.edu.ng; tn.akaegbobi@unizik.edu.ng 

DOI: https://doi.org/10.5281/zenodo.16927526 

 

Abstract: The study ascertained the effect of board of directors’ independence on bankruptcy risk 

in deposit money banks in Nigeria. Ex-post facto research design was adopted for the study. A 

sample of eight deposit money banks was purposively selected while other banks were inevitably 

excluded for unavailability of data. Data were generated from the annual reports and accounts of 

the selected banks in Nigeria. Panel data were analyzed with descriptive statistics, and panel 

regression analysis was used to test the hypothesis. The study shows that the board of directors’ 

independence had a negative and significant effect for Nigerian deposit money banks, while that of 

South African showed a positive and has a significant effect on bankruptcy risk.  Based on this, there 

is need to strengthen the board of director’s independency, such as having more independent 

directors so as to monitor management decisions and prevents opportunistic behaviour, reducing 

the risk of bankruptcy. 

Keywords: Directors’ independence, Bankruptcy risk and Deposit money banks 

 

Introduction  

The more board independence, the more the investment and the higher the financial performance, 

board independence could lead to better decisions that are in the best interest of the organization and 

good decisions assist towards achieving an improved financial performance. Despite the importance 

of the financial growth to businesses, it could be influenced by the board characteristics. Board 

characteristics are every attributes and features of a firm’s board that permits the successful and 

efficient pursuit or full realization of the interests of the various stakeholders (Augustine, & Juliet, 

2022). The attributes could be quantitative or qualitative, the quantitative (tangible) variables include 

audit committee independence, remuneration committee, board gender diversity, and board of 

director’s independence and on the other hand, the qualitative or intangible variables include quality 

decisions, production of positive values (Kamaludin, et al 2020).  

Financial distress is a broad concept used to describe situations in which firms face financial 

difficulty. The most common terms used interchangeably for financial distress are ‘failure’, ‘default’, 

mailto:on.okeke@unizik.edu.ng
mailto:tn.akaegbobi@unizik.edu.ng


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‘insolvency’, and ‘bankruptcy’ (Geng, et al, 2015). However, bankruptcy is the extreme and 

irredeemable outcome of financial distress and as such many financially distressed firms escape 

bankruptcy due to early reconstruction of operations. There are many definitions of financial distress 

because different countries have different accounting procedures and rules. It is generally believed 

that it is a situation where operating cash flow does not exceed negative net assets (Li et al., 2014). 

Geng et al. (2015) stated that some of the methods that have been used for financial distress 

prediction include discriminant analysis, logit or probit regression model, linear conditional 

probability models, neural network, decision trees, case based reasoning, genetic algorithm, rough 

sets, support vector machine, and others. However, the assumptions underlying the majority of these 

methods are far from real world situation. Extant research has focused on the discovery of better 

models for financial distress prediction (Ayoola & Obokoh, 2018). In Nigeria, Okoye and Okoye 

(2022); Ayoola and Obokoh (2018) investigated the effect of board characteristic on bankruptcy 

prediction in Nigerian banks which data ended in 2020, thereby created a periodic gap. This study 

therefore, sought to assess the effect of board of directors’ independence on bankruptcy risk of deposit 

money banks in Nigeria. 

Conceptual Review  

Board Independence Committee 

Independent directors are the non-executive directors appointed into the board to represent the 

shareholders. Board independence is by and large influenced by how it is composed. A board is said to 

be independent if made up of more non- executive directors. The independent outside director brings 

to fruition the desired neutrality and minimalize bias in the board process (Bhakat & Black, 2002). In 

line with this, Elshandidy et al. (2013) argued that having a good number of independent directors on 

the board would foster greater disclosure by the company. However, Gul and Leung (2004) 

documented that the presence of independent directors may not likely address the issue of disclosure 

as a result of complex board structure, hence, hypothesized that independent board of directors does 

not have significant effect on risk disclosure of Nigerian banks. 

The global economy appears to have become caught up in what might be described as outside 

directors, euphoria (Dahya & Connell, 2017). Olubunmi (2021) study the effect of diversity on the 

financial performance of the board of directors of Nigerian citation companies. The results revealed 

that board independence, board gender diversity, and board size have a positive impact on the after-

tax profits of selected listed companies in Nigeria. Similarly, Oyewale et al. (2019) study the 

relationship between board independence and the financial performance of listed manufacturing 

companies in Nigeria was investigated in this study. The result confirms that there is a significant 

positive linear relationship between board independence and financial performance of listed 

manufacturing companies in Nigeria. 



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To this end different studies have established negative result, Jibril and Maikano (2022) and Akpan 

and Amran. (2017) examine the relationship between board characteristics and company 

performance in Nigeria. The studies established that there is no relationship between boards’ equity, 

board independence, and board age. 

Bankruptcy Prediction 

In addition, a prediction (Latin præ-, "before," and dicere, "to say"), or forecast, is a statement about a 

future event. A prediction is often, but not always, based upon experience or knowledge. There is no 

universal agreement about the exact difference between the two terms; different authors and 

disciplines ascribe different connotations. Although future events are necessarily uncertain, so 

guaranteed accurate information about the future is in many cases impossible, prediction can be 

useful to assist in making plans about possible developments; Howard H. Stevenson writes that 

prediction in business "... is at least two things: Important and hard (Stevenson, 2008). 

Bankruptcy prediction has been one of the most challenging tasks in accounting since the study of 

FitzPatrick in 1930’s and during the last 60 years an impressive body of theoretical and especially 

empirical research concerning this topic has evolved (Zavgren, 1983). The Altman models have been 

challenged by approaches directly producing probabilities of bankruptcy, such as the logit model, as 

well as by more advanced machine-learning methods. Direct application of the Z-Score or its variants 

has proved problematic in other countries, under other legal regimes (accounting principles), and in 

other time frames. However, indirect applications (e.g., models with the same variables estimated for 

a new data set) are still acceptable. Let us cite here the paper by Altman et al. (2017) that shows the 

validity of the Z-Score approach internationally with large data sets, also compared to logit models 

that performed similarly or better. It is also worth referencing the paper by Barboza et al. (2017), 

which compares several machine-learning methods to discriminant analysis and logistic regression in 

predicting bankruptcy. It turns out that the Altman Z-Score variables fare relatively well in other 

setups and models. 

Today a large area of finance is dedicated to forecasting financial distress or bankruptcy, employing 

appropriate methodology. Nonetheless, it seems that the finance profession in academia still does not 

recognize this new methodology as staple content in core corporate finance and accounting courses. 

The notable exceptions are textbooks by Damodaran (Applied Corporate Finance, 5th ed., 

Damodaran, 2015) and Berk and DeMarzo (Corporate Finance, 4th ed., Berk & DeMarzo 2017). 

The methodology of bankruptcy modelling may be attributed to financial micro econometrics and 

more recently, to advanced data analysis. Financial micro econometrics “emerges as a natural 

consequence of applying statistical and econometric methods to corporate finance, accounting, and 

other fields of finance; the applied edge of research in accounting and corporate finance is inevitably 

https://en.wikipedia.org/wiki/Latin
https://en.wikipedia.org/wiki/Forecasting
https://en.wikipedia.org/wiki/Event_(probability_theory)
https://en.wikipedia.org/wiki/Connotation
https://en.wikipedia.org/wiki/Uncertainty
https://en.wikipedia.org/wiki/Planning


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linked with the use of notions such as statistical sample, population, and the operation on sets of 

microdata” (Gruszczy´ nski 2018). 

Empirical 

Dalia (2023) examined the relationship between corporate governance and intellectual capital from 

2017 to 2021. The modified Altman Z Score model was used to measure bankruptcy risk, and the 

value-added intellectual coefficient (VAIC) model was used to measure intellectual capital. The results 

also show an insignificant influence of board independence and audit committee size on intellectual 

capital efficiency. Moreover, this study finds that companies with intellectual capital efficiency are less 

likely to go bankrupt. Furthermore, the results indicate that board size, independence, and meetings 

have a significant negative effect on bankruptcy risk. Keerthana and Balagobei (2022) examined the 

impact of board characteristics on the financial distress of listed companies in Sri Lanka from 2019 to 

2021. Panel regression analysis was employed, and 36 listed companies representing the consumer 

service sector in Sri Lanka were selected as the sample. This research focuses on five aspects of board 

characteristics consisting of board size, board composition, CEO duality, board meetings, and 

directors' ownership while financial distress was measured using Altman's Z score model. The results 

reveal that board size, board composition, and directors' ownership have a significant positive impact 

on financial distress whereas CEO duality has a significant negative impact on financial distress. 

Maina (2020) established the relationship between board characteristics and financial distress of 

listed commercial banks in Kenya. Correlation research design was adopted. A Census study of 11 

listed commercial was adopted. Secondary data was collected from years 2011 to 2018. Inferential 

analysis and descriptive statistics were used to analyze data which was presented in tables, graphs and 

figures. The study further found a positive and insignificant relationship between independent 

directorship and financial distress. Governance disclosure had a positive and significant effect on 

financial distress. Governance disclosure has a positive and significant moderating effect on 

relationship between ownership structure, board structure and financial distress. Partha, et al (2019) 

assessed the effect of audit committee characteristics on the relationship between financial distress 

and income maximization actions. The study collected data among 37 companies that were listed in 

Indonesia Securities Exchange from 2015 to 2018. Regression modelling analyzed the data. Study 

findings documented that the committee financial expertise weakened the relationship between 

financial distress and income maximization actions. Audit committee independence had positive and 

significant moderating effect on the relationship between financial distress and income maximization 

actions. Alkilani, Hussin and Salim (2019) studied the effect of audit committee characteristics on 

audit opinion of Jordan companies. Judgemental sampling was adopted in selection of 117 companies 

listed in Amman Stock Exchange. Accounting committee characteristics examined were expertise, 

independent directorship, meetings and size. Logistics regression modelling was fitted. It was 



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documented that audit committee characteristics had significant influence on modified audit opinion. 

Salloum, Azzi and Gebrayez (2019) explored the effect of audit committee characteristics on financial 

distress of financial institutions in Middle East. A sample of 54 Lebanese banks was examined for 

periods 2009 to 2011. Financial distress was operationalized through evaluation of profitability. 

Regression findings revealed an inverse and significant relationship between frequency of audit 

committee meetings and financial distress. Aman (2019) sought to assess the determinants of 

financial distress in Ethiopian banking sector. Quantitative research design was applied, and data 

collected from 15 banks from 2012 to 2016. Univariate and multivariate statistics analyzed the data. 

Study findings documented that profitability and liquidity had positive and significant influence on 

financial distress (debt service coverage). Further, inflation, solvability, firm size had inverse 

significant effect on debt service coverage. The model had higher odds of being spurious since there 

was a mix of time series and panel data.  Khurshid, et al (2018) evaluated the impact of corporate 

governance on likelihood of financial distress of non-financial companies in Pakistan. Particularly, the 

study examined the effect of board composition, ownership structure, audit quality, board size, CEO’s 

duality, board independence, insider’s directorship, institutional investment and financial distress. 

Binary logistics model was fitted on secondary data gathered from 2009 to 2016. Study findings 

documented that there was significant negative impact on likelihood of financial distress between 

board size, insider director’s ownership and audit quality. Fashan and Fitriana (2018) undertook a 

study to identify the impact of corporate governance and intellectual property rights on financial 

distress of listed manufacturing companies from 2014 to 2016 in Indonesia securities exchange. 

Purposive sampling was adopted in selected of 249 manufacturing companies. Univariate, bivariate 

and multivariate data analysis procedure were adopted. Study findings documented that there was no 

significant association between corporate governance and financial distress of manufacturing 

companies. Fuad (2017) sought to assess the impact of audit committee characteristics on financial 

distress of listed companies in Indonesia Securities Exchange. Judgemental sampling was adopted in 

selection of 123 service-based companies listed from 2013 to 2015. Financial distress was 

operationalized as firms which had recorded losses of two consecutive years. Binary logistics 

regression model was fitted. Study findings documented that there was an inverse effect of audit 

committee competence and financial distress. Further, there was an inverse and insignificant effect of 

audit committee meeting and financial distress. Jalan, Kale, and Meneghetti (2016) examined the 

effect of leverage and bankruptcy risk on corporate incentives to shelter income from taxes. Their 

empirical tests provide evidence that is consistent with these theoretical predictions. They show that 

leverage and bankruptcy risk relate negatively to sheltering and that the negative effects of 

bankruptcy risk and debt on sheltering are stronger for riskier firms; and weaker for larger, better 

governed, more profitable firms, and for firms that are in the “public eye”. Masoumeh (2016) 



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investigated the relationship between earnings management and quality of earnings for the bankrupt 

and non-bankrupt firms listed in the Tehran Stock Exchange from 2007 to 2012. Also, the future 

profitability was measured by each of the three variables, future change of earnings, future cash flow 

from operation, and future non-discretionary earnings. The results of estimating unbalanced panel 

data technique for 55 firms subjected to bankruptcy of Altman's model, and 198 non-bankrupt firms, 

shows that the bankrupt firms tend to use opportunistic earnings management, and the non-bankrupt 

choose efficient earnings management. Ahmadpour and Shahsavari (2014) investigated the earnings 

quality management and impact on the profitability of future profits of Tehran’s stock exchange 

bankrupt companies. The results with the technique panel data for 55 companies subject to the verge 

of bankruptcy Altman’s model, stating that these companies have a disproportionate composition and 

proceeded to increased profit management. The results of opportunistic theory of earnings 

management support and show that the future profitability of earnings quality work. Campa, Del Mar 

and Miñano (2014) conducted a study on the response to the question whether Spanish companies go 

bankrupt, compared to their counterparts, during the years prior to the procedure of bankruptcy law 

tend to manage earnings or not? In the analysis of a sample matched bankrupt companies, it became 

clear that earnings management of bankrupt companies is more than those in non-bankrupt them. 

They achieved this accomplishment of accrual and manipulation of actual items. Findings showed 

that management tools profit operates by industry in which the company and the years of pre-

bankruptcy are changed. Ezejiofor, Nzewi and Okoye (2014) determined the effect of Altman Model to 

predict possibility on corporate bankruptcy/ failure in Nigerian banking sector. Data were collected 

from annual reports and accounts of the banks. Altman prediction was applied. Findings show that 

the Model was capable of measuring accurately the failure potential of sound and healthy banks.  

Methodology 

Research Design  

Ex-Post-Facto research design was used for the study. This involves use of financial accounts of the 

banks under assessment for the period, 2012-2024 to generate the financial ratios that discriminated 

the most in prediction of healthy banks using Altman Model. The population of the study comprised 

of listed banks in the Nigeria. Given the above, the study population is made up of twenty eight (28) 

banks in Nigeria. As a result, the "purposive sampling technique was applied (Non-random sample). 

The study employed eight Nigerian deposit money banks licence with international authorization. 

Source of Data 

Data were generated from from the annual reports and accounts of the selected banks in sub-Sahara 

Africa. The statement of financial position and comprehensive incomes provided data will use in 

computing the selected ratios from 2013-2024. Hence, the decision to select 2012 year which is based 

on the most recent year of adoption as evidenced in Nigeria.  



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Model Specification 

The data required were those of the dependent variable that include: Altman prediction model 

(working capital, retained earnings, earnings before interest and tax, equity as well as total assets and 

total book debts) and independent variable, board independence. This was obtaining from the audited 

reports and accounts of the banks under assessment.  

The study used Altman Model given as Zeta “Z” 

Z=1.2X1 + 1.4X2+ 3.3X3 + 0.6X4 + 1.0 X5,  

Where: 

          X1         =       Working capital to total assets 

          X2         =       Retained earnings to total assets 

          X3      =       Earnings before interest and taxes to total asset 

          X4         =       Value of equity to total book debt 

          X5         =       Gross earnings to total assets 

The decision rule is that: 

 (i). For Z<1.81 Bankruptcy region 

 (ii). For 1.81<Z>2.675 High bankruptcy potential 

 (iii). For 2.675<Z<2.99 Low bankruptcy potential 

 (iv). For Z>2.99 Strong (No sign of bankruptcy at all). 

The Altman Model will be modified thus to incorporate corporate governance: 

ATMNit = a0 + β1BINDit urt …………….......................i 

Where; 

ATMN= Altman Prediction Model 

BIND = Board independence 

Method of Data Analysis  

Data were analyzed with descriptive statistics, and the hypotheses will be tested with Pearson 

correlation, and multiple regression analysis. Since the focus of the study is to examine the effect of 

asset composition on financial performance, regression analysis becomes appropriate tool for it.  

Descriptive statistics employed to summarily describe the mean, median, standard deviation, kurtosis 

and skewness of the study variables. Inferential statistics will also be utilized with the aid of E-Views 9 

using: 

i. Coefficient of correlation: which is a good measure of relationship between two variables that tell us 

about the strength of relationship and the direction of the relationship as well?  

ii. Panel Regressions analysis: Regression analysis predicts the value the dependent variable based on 

the value of the independent variable and explains the impact or effect of changes in the values of the 

variables. 



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Decision Rule 

Accept the alternative hypothesis, if the Probability value (P-value) of the test is less than 0.05 (5%). 

Otherwise reject. 

Data Analysis and Results 

Data Analysis 

Table 1: Descriptive Statistics 

 ATMN BIND 

 Mean  54.87547  13.76923 

 Median  0.210044  16.00000 

 Maximum  652.9549  17.00000 

 Minimum  0.055106  9.000000 

 Std. Dev.  174.1820  3.528609 

 Skewness  3.132913 -0.490033 

 Kurtosis  10.90951  1.347170 

 Jarque-Bera  441.2242  16.00030 

 Probability  0.000000  0.000335 

 Sum  5707.049  1432.000 

 Sum Sq. Dev.  3124955.  1282.462 

 Observations  104  104 

Source: E-views 9 (2025) 

From Table 1, it could be observed that the mean values of the bankruptcy risk (ATMN) stood at 

54.875. Considering that the scientific value of Nigerian firms. The board independent (BIND) has the 

mean values stood at 13.769 Nigerian banks which implied that banks in Nigeria maintained optimum 

board independence.  

The kurtosis of    10.90951 and 1.347170 for Nigerian banks ATMN and BIND showing a distribution 

that is strong, suggesting a concentration of values around the mean with potential outliers. The 

Jarque-Bera probability of   0.000000 and 0.000335 confirmed that the ATMN, and BIND data is 

significantly non-normally distributed showed that traditional parametric analyses may need to be 

approached with caution. On the Jarque–Bera test of goodness-of-fit, the result suggested that only 

the data on firms in the Nigerian sample banks followed a normal distribution.  

Test of Hypothesis 

Ho: Board of directors’ independence has no significant effect on bankruptcy of risk deposit money 

banks in Nigeria. 

Table 2: Regression analysis between BIND and ATMN  

Dependent Variable: ATMN   



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Method: Panel Least Squares   

Date: 06/11/25   Time: 07:57   

Sample: 2012 2024   

Periods included: 13   

Cross-sections included: 8   

Total panel (balanced) observations: 104  

     
     Variable Coefficient Std. Error t-Statistic Prob.   

     
     C 345.9983 62.75989 5.513048 0.0000 

BIND -21.14300 4.416612 -4.787153 0.0000 

     
     R-squared 0.283457     Mean dependent var 54.87547 

Adjusted R-squared 0.275451     S.D. dependent var 174.1820 

S.E. of regression 158.1654     Akaike info criterion 12.98420 

Sum squared resid 2551661.     Schwarz criterion 13.03506 

Log likelihood -673.1785     Hannan-Quinn criter. 13.00481 

F-statistic 22.91684     Durbin-Watson stat 2.720898 

Prob(F-statistic) 0.000006    

     
     
Source: E-views 9 Output (2025) 

In table 2, a simple least square regression analysis was conducted to test the effect between board of 

directors’ independence (BIND) and bankruptcy risk (ATMN) for Nigerian deposit money banks. The 

R-squared is coefficient of determination which tells us the variation in the dependent variable due to 

changes in the independent variable. From the findings in the table 2, Nigerian value of R squared 

was 0.28, an indication that there was variation of 28% on ATMN due to changes in BIND. This 

implies that 28% changes in ATMN could be accounted for by BIND, while 72% was explained by 

unknown variables that were not included in the model.  

The Durbin-Watson Statistic of 2.72 suggested that the model does not contain serial correlation. The 

F-statistic of the regression is equal to 22.917. The associated F-statistical probability is 0.000. 

The hypothesis of this study stated that board of directors’ independence has no significant effect on 

bankruptcy risk of deposit money banks in Nigeria. The evidence provided by the regression result of 

model showed that the variable of board of directors’ independence had a negative coefficient of -

21.14300 and a p-value of 0.000 which was significant at 5% level for Nigerian deposit money banks. 

It meant that there was a significant effect between board of directors’ independence and bankruptcy 

risk in Nigeria. 



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The regression result revealed that board of directors’ independence had a negative coefficient of -

21.14300 and a p-value of 0.000 which was significant at 5% level for Nigerian deposit money banks; 

while the outcome of model 2 showed a positive coefficient of 0.888108 (p-value 0.020) for deposit 

money banks in South Africa, and also has a significant effect.  This result affirmed the study of Okoye 

and Okoye (2022) showed that board of directors’ independence has a positive significant effect on 

bankruptcy risk of deposit money banks in Nigeria. Dalia (2023) indicate that board independence, 

has a significant negative effect on bankruptcy risk. Also the study of Mohammed and Onipe (2023) 

found that board independence shows negative significant effects. 

However, the study disagreed with Maier and Yurtoglu (2022) who found that board independence 

and decrease bankruptcy risk in financially non-distressed firms, they have the opposite effect in 

financially distressed firms; Aliyu, Onipe and Samuel (2023) showed that board independence show 

insignificant effects.  

Conclusion  

This study ascertained the effect of board of directors’ independence on bankruptcy risk in deposit 

money banks in Nigeria. Data were generated from 2012 to 2024 from the audited annual reports and 

accounts of the sampled deposit money banks in Nigeria. Using regression analysis, the study 

discovered that board of directors’ independence had a negative and significant effect bankruptcy risk 

for Nigerian deposit money banks. Based on this, there is need to strengthen the board of director’s 

independency, such as having more independent directors so as to monitor management decisions 

and prevents opportunistic behaviour, reducing the risk of bankruptcy.  

References  

Ahmadpour, A., & Shahsavari, M. (2014). Earnings management and earnings quality impact on the 

future profitability of bankrupt.  

Alkilani, S. Z., Hussin, W. N. W., & Salim, B. (2019). The influence of audit committee characteristics 

on modified audit opinion in Jordan. Journal of Finance and Accounting, 7(3), 95-106. 

Aman, E. E. (2019). Determinants of financial distress in Ethiopia banking sector. International 

Journal of Scientific and Research Publications, 9(5), 98-107 

Ayoola T. J. & Obokoh , L. O. (2018). Corporate Governance and Financial Distress in the Banking 

Industry: Nigerian Experience. Journal of Economics and Behavioral Studies. 10(1); 182-193, 

(ISSN: 2220-6140)  

Akpan, E. O., & Amran, N. A. (2014). Board characteristics and company performance evidence from 

Nigeria: Journal of Finance and Accounting, 2(3), 81-89.  



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Altman, E., Iwanicz-Drozdowska, M. Erkki L., & Arto S. (2017). Financial distress mprediction in an 

international context: a review and empirical analysis of Altman’s Z-Score Model. Journal of 

International Financial Managament & Accounting 28: 131–71. 

Augustine, O. O. & Juliet, C. U. (2022). Board characteristics and financial performance of 

conglomerates in Nigeria. European Journal of Business and Management Research, 7(2), 12-

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