Date of submission: February 24, 2023; date of acceptance: August 23, 2023. * Contact information: quadriyusuf@gmail.com, Department of Accounting and Finance, Kwara State University, Malete, Nigeria, phone: +234(0)8065587154; ORCID ID: https://orcid.org/0000-0002-3755-7924. ** Contact information: ifedolapoomotosho22@gmail.com, Department of Account- ing and Finance, Kwara State University, Malete, Nigeria, phone: +234(0)7038333630; ORCID ID: https://orcid.org/0009-0005-7365-3613. *** Contact information: oshoprints@gmail.com, Department of Accounting and Finance, Kwara State University, Malete, Nigeria, phone: +234(0)7036215657; ORCID ID: https://orcid.org/0000-0003-1365-2860. **** Contact information: isalekoko247@gmail.com, Department of Accounting and Finance, Kwara State University, Malete, Nigeria, phone: +234(0)8038950868; ORCID ID: https://orcid.org/0000-0001-9921-2131. Copernican Journal of Finance & Accounting e-ISSN 2300-3065 p-ISSN 2300-12402023, volume 12, issue 3 Quadri, Y.O., Omotosho, I.O., Saheed, D.O., & Adio, B.O. (2023). Board Characteristics, Asset Quality and Financial Performance of Deposit Money Bank. Copernican Journal of Finance & Accounting, 12(3), 65–78. http://dx.doi.org/10.12775/CJFA.2023.016 yusuf olamileKan quadri* Kwara State University ifedolapo oluwasolape omotosHo** Kwara State University daud omotosHo saHeed*** Kwara State University babatunde abdullaH adio**** Kwara State University board cHaracteristics, asset quality and financial performance of deposit money banK Keywords: board size, board credit committee, asset quality, financial performance. J E L Classification: G21, G38, L25. Y. O. Quadri, I. O. Omotosho, D. O. Saheed, B. A. Adio6666 Abstract: This study evaluates how the board composition and asset quality of Nige- rian deposit money banks affected their financial performance. The study used a sam- ple size of 20 out of 33 deposit money banks and an ex-post facto research design. Panel least square regression techniques were then used to assess the secondary data gath- ered from the audited financial records of the participating deposit financial institu- tions for the years 2014 to 2021. The study found that while asset quality has a negative impact on the performance of Nigerian banks, the size of the board and the makeup of the credit committee have a beneficial impact. As a result, the study came to the con- clusion that board qualities and asset quality are two further elements that affect de- posit money bank performance in Nigeria. In order to ensure that its members are ap- propriately diverse and in compliance with the Corporate Governance Code, the study proposed that the size of deposit money institutions’ boards be rationalized. In order to guarantee that banks are not exposed to excessive risk, it was also advised that the Central Bank of Nigeria should keep an eye on the operations of the credit committee.  Introduction Introduction The banking industry is central and serves as backbone to any country’s eco- nomic growth, as it impacts on the money stocks’ level through the capacity to build up deposits and liabilities. The industry provides access to payment sys- tem, enable financial services for commercial enterprises and general public and act as a go-between (intermediary) for individuals with extra money (sur- plus units) and those who need it (deficit units). Noting all these prime func- tions, the performance of banks is very important for any country to grow its economy as the proficient and compelling banking industry’s performance over time is a manifestation of financial and fiscal stability, competitiveness and long-term viability. The level of credit that banks provide to the general public for useful and industrious undertakings is also very important for a country’s economic expansion (Kolapo, Ayeni & Oke, 2012). Notably, board characteristics are predominantly imperative in the Nigeri- an banking industry on the ground that various financial catastrophes, frauds, and sketchy corporate practices had unfavourably influenced the confidence of the investors. Practices of corporate governance and operative boards are fundamental ingredients towards accomplishing and keeping up with the con- fidence level and public trust in the financial system (Odudu, James & James, 2016). The board of an organization serves as the primary governing body and is entrusted with the crucial tasks of providing leadership, fostering innova- tion, upholding ethical standards, and making informed decisions to ensure the long-term sustainability and success of the company (Subair, Salman, Abolarin, Board CharaCtEristiCs, assEt quality and finanCial PErformanCE… 6767 Abdullahi & Othman, 2020). However, poor boards could thusly prompt a sud- den spike in the problematic dealings, bank unemployment, fraudulent exer- cise, which may upshot adverse economic consequence (Ogbechie & Koufopou- los, 2010). Being the zenith of internal control framework, major responsibility is borne by the board for the smooth working of the bank, thereby checking and directing banks’ top management with fiduciary commitment to depositors as well as shareholders in the complex banking environment. Furthermore, the banks’ asset quality and the situation around board char- acteristics as a corporate governance instrument persistently remain a critical worry for the policymakers, regulatory bodies, financial backers, profession- als, market participants and the general stakeholders. Deposit money banks are over-burden with a gigantic heap of non-performing assets as corporate failures and scandals continue to occur. For instance, Skye Bank Plc. and Spring Bank Plc. in Nigeria (the issue of capital mishandling) suffered from weak cor- porate governance in terms of their characteristics such as size, composition, financial knowledge or expertise, credit committee among others. According to Abata (2014), the deterioration in the quality of bank assets could be caused by a lack of knowledge about loan quality as this is one of the main factors that contributes to the financial system’s vulnerability. Asset quality management needs to be prioritized by banking institutions in nations with weak bank- ing systems in order to ensure the banking industry’s long-term viability. The Central Bank of Nigeria (CBN) has established a number of policies and strate- gies aimed at ensuring a robust as well as sound banking atmosphere towards safeguarding the interest of numerous stakeholders and combating this glob- al trend of asset quality deterioration, but despite their exertions, the banking industry seamlessly have problems that harm the customers and other inves- tors, thereby prompting a cushion and bailout of few failing banks. From the foregoing, it becomes imperative to concurrently examine how asset quality and board characteristics impact on the Nigerian deposit money banks’ finan- cial performance incorporating bank credit committee which previous studies failed to use. To achieve this, the following hypotheses are formulated: HO1: The size of the board of directors of Nigerian banks does not have a sig- nificant impact on their financial performance. HO2: The board credit committee does not have a significant impact on the financial performance of the Nigeria’s deposit money institutions. HO3: Nigerian deposit money institutions’ financial performance is not af- fected by asset quality. Y. O. Quadri, I. O. Omotosho, D. O. Saheed, B. A. Adio6868 Theoretical FrameworkTheoretical Framework After reviewing various theories on the subject, this study uses the resource de- pendence and agency theory as they explain how board members can contribute to the success of a company by improving their performance. The agency theo- ry postulates that corporate leaders are paid to represent the company’s own- ers and protect their interest (Ujunwa, Okoyeuzu & Nwakoby, 2012). In addition to being able to control the operations of the company, a board of directors also aims to encourage the agents to perform their duties in a way that is aligned with the company’s goals. The board of directors is responsible for address- ing shareholder and manager issues related to the organization’s operations as having an organized and well-rounded board can help improve the efficiency of an organization. According to Bowie and Freeman (1992), while resolving con- flicts, the board should consider adopting a risk tolerance policy as it is the pre- rogative of bank managers not to expose their institutions to unnecessary risks by granting loans and advances, so, the board is also responsible for mitigating these risks and improving the financial performance of these banks. The concept of resource dependence states that a board member can act as a resource that can be used to replace other resources or change the en- vironment; enhance the firm’s public image and provide relevant expertise. It can also help the firm access capital and develop relationships with other sig- nificant entities since they are all interrelated (Bathula, 2008; Yusoff & Alhaji, 2012). While organizations tend to take advantage of their surroundings by appropriating resources for their survival, boards are also beneficial because they act as a conduit between an organization and external resources. Having external directors on the board helps an organization gain access to important resources, which are vital to its success (Sarens & Merendino, 2016). Research methodologyResearch methodology Ex-post facto research design was used for this study because its goal is to ex- amine how certain independent variables affect a particular dependent vari- able and the particular traits of the variables cannot be manipulated. For the eight-year period from 2014 to 2021, the population of interest for this study included the thirty-three (33) deposit money banks as of December 2021. Board CharaCtEristiCs, assEt quality and finanCial PErformanCE… 6969 The target respondents (sample size) is 20 money deposit banks out of the 33 DMBs. The sample size represents those deposit money banks that have in- ternational, national and non-interest banking license. Considering the vari- ables to be tested for this study, regional factors could influence the result which made the researcher to focus on banks with international and national license. Purposive sampling approach was employed to choose the aforemen- tioned sample size in order to increase the population’s representativeness and meet the study’s goals. The study also used a Panel Least Square regression model, because the panel least square regression technique is effective and efficient at calculating the statistical link between and influence of one variable on another variable. Since this study uses panel data, a pairwise correlation test was undertaken before the main analysis to determine the link between the independent and dependent variables as well as to test for multi-collinearity among the regres- sors in accordance with the traditional OLS assumption. Also, Housman testing was done to choose between fixed and random effects. The model of Abdul Gafoor, Mariappan and Thyagaraja (2018) was adapted and stated as: ROA = ƒ(BC, AQ) (1) ROAit = α + β1Bsizeit + β2 Bcreditit + β3 NPLit + β4 LEVit + µit (2) Where: ROA = Return on Assets of bank i at time t, β0 = the intercept of the equation, β1-4 = Coefficient of the independent variables, Bsizeit = Board Size of bank i at time t, Bcreditit = Board Credit Committee of bank i at time t, NPLit = Non-performing loan of bank i at time t, LEVit = Leverage of bank i at time t, μit = Error Term. Y. O. Quadri, I. O. Omotosho, D. O. Saheed, B. A. Adio7070 Results Results Descriptive statisticsDescriptive statistics Table 1. Descriptive Statistics of the Variables ROA Bcredit Bsize LEV NPL Mean 0.200603 0.631272 0.017804 0.157511 0.020841 Median 0.184884 0.598039 0.015162 0.095194 0.011092 Maximum 1.406169 0.967756 0.155460 1.380923 0.103418 Minimum 0.000000 0.121342 -0.006346 0.000000 -0.024242 Std. Dev. 0.144541 0.201748 0.021434 0.225172 0.027076 Skewness 5.450881 -0.058050 4.376248 3.147126 1.497519 Kurtosis 44.17694 2.281495 28.99845 13.80397 4.982631 Sum 24.07236 75.75268 2.136526 18.90130 2.500935 Sum Sq. Dev. 2.486170 4.843589 0.054672 6.033588 0.087238 Observations 120 120 120 120 120 S o u r c e : Author’s computation, 2022. The mean and standard deviation of return on asset (table 1) are 0.2006 and 0.1445 respectively indicating that the data depart from the mean by 0.1445 and the data are clearly substantially distributed from the mean. The board credit committee’s mean score of 0.6313 and standard deviation of 0.2017 in- dicate that the sampled DMBs’ board credit committees differ from the mean value on both sides by 0.2017. The board sizes range from -0.0064 to 0.1555, with an average of 0.0178 and a standard deviation of 0.0214 indicating that the value deviates from the mean by 0.0214 on both ends, showing that the data is dispersed from the mean because the standard deviation is higher than the mean. In addition, the investigated deposit money institutions’ average lever- age is 0.1575, with a standard deviation of 0.2252 while asset quality has an av- erage value of 0.0208 and a standard deviation of 0.0271. Accordingly, the data is not widely spread because the standard deviation is just a little bit larger than the mean. Board CharaCtEristiCs, assEt quality and finanCial PErformanCE… 7171 Pairwise CorrelationPairwise Correlation Table 2. Pairwise Correlation ROA Bcredit Bsize NPL LEV ROA 1.000000 Bcredit 0.209925 1.000000 Bsize 0.433825 -0.072232 1.000000 NPL -0.085688 -0.196612 -0.241308 1.000000 LEV -0.105509 -0.031066 -0.004951 0.000496 1.000000 S o u r c e : Author’s computation, 2022. Table 2 shows that the board credit committee has a 0.209925 positive cor- relation coefficient with return on assets. This suggests that the board credit committee and return on asset have a moderately good association. Further- more, with a correlation of 0.433825, board size is positively correlated with return on asset. This also suggests that the return on asset and board size have a moderate relationship. The return on asset is similarly positively correlated with financial skill and bank size, with coefficients of 0.158134 and 0.016845, respectively. Asset quality and leverage, on the other hand, are inversely con- nected with return on assets. This demonstrated the fact that the variables and the return on asset have a negative relationship. Pairwise correlation was used in this study to investigate the latent compo- nents through a correlation matrix in order to find multicollinearity. A correla- tion coefficient of 0.90 and above, according to Hair, Black, Babin and Anderson (2010), implies multicollinearity between exogenous latent components. The result demonstrates that the variables do not multi-collinear. Y. O. Quadri, I. O. Omotosho, D. O. Saheed, B. A. Adio7272 Regression ResultRegression Result Hausman TestHausman Test Table 3. Hausman Test Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob. Cross-section random 7.945486 7 0.3374 Cross-section random effects test comparisons: Variable Fixed Random Var(Diff.) Prob. BCREDIT 0.229470 0.205724 0.001283 0.5073 BSIZE 2.863055 2.891225 0.059302 0.9079 LEV 0.059837 0.028885 0.003166 0.5823 NPL 0.566834 -0.098868 0.132305 0.0672 S o u r c e : Author’s computation, 2022. The endogenous regressors were tested using the Hausman specification test, the results of which are shown in Table 3. It is possible to verify that there is no relationship between a predictor variable and an error term by determining the values of the endogenous regressors that are influenced by other factors in the system. Table 3 shows that the chi2 value is more than the significant mar- gin of 0.0500, at 7.9454 with a probability of 0.3374. The null hypothesis, which states that the discrepancy in coefficients is not systematic, is therefore accept- ed. The results lead to the recognition and understanding of the random effect as the most suitable model. Board CharaCtEristiCs, assEt quality and finanCial PErformanCE… 7373 Panel Least Squares Regression ResultPanel Least Squares Regression Result Table 4. Panel Least Square Regression Variable Coefficient Std. Error t-Statistic Prob. C 0.339927 0.078649 4.322085 0.0000 BCREDIT 0.229470 0.078170 2.935546 0.0042 BSIZE 2.863055 0.684794 4.180899 0.0001 LEV -0.059837 0.079647 -0.751279 0.4545 NPL -0.566834 0.605568 -0.936038 0.0318 Effects Specification R-squared 0.419988 Mean dependent var 0.200603 Adjusted R-squared 0.215666 S.D. dependent var 0.144541 S.E. of regression 0.128010 Akaike info criterion -1.050244 Sum squared resid 1.442009 Schwarz criterion -0.306913 Log likelihood 95.01466 Hannan-Quinn criter. -0.748374 F-statistic 2.055516 Durbin-Watson stat 2.045079 Prob(F-statistic) 0.004683 S o u r c e : Author’s computation, 2022. Discussion of FindingsDiscussion of Findings The study analyzed the data collected from the financial accounts of Nigeri- an banks. It revealed that the quality of the board and the asset quality of the banks had a significant influence on their performance. The study also found that the size of the board is beneficial. The composition and experience of the board of directors of financial institutions are important factors that are con- sidered when making decisions regarding the performance of their operations. Experience has demonstrated that the dominance of the board’s decision-mak- ing by one person or a small group of people has been a defining characteristic of many significant public companies that have collapsed dramatically in the past. Y. O. Quadri, I. O. Omotosho, D. O. Saheed, B. A. Adio7474 This finding conforms with Abdul Gafoor et al., (2018); Anis, Chixema, Lui and Fakhreldin (2017); Javed, Saeed, Lodhi and Malik (2013); Johl, Kaur and Coop- er (2015); Odudu et al., (2016); Jadah, Murugiah and Adzis (2016) who assert- ed that the bigger the board size, the better for the performance of the firms. This finding is however contrary to Chechet, Yancy and Akanet (2013); Hassan and Farouk (2014); Ghabayen (2012); Musa, Jerry and Abdulrasheed (2020) who opined that larger board size negatively affects the performance of firms. Furthermore, the research found that the board credit committee has posi- tive impact on the financial performance of deposit money banks in Nigeria and the result shows that it is statistically significant. This implies that board credit committee plays a supervision role to the banks’ loan officers who di- rectly relates to banks customers and evaluate their loan proposal. The board credit committee having exercised their objective analysis in appraising the loan proposal submitted by banks customers, the credit risk of the banks that may constitute loss to the banks will be reduced to a barest minimum there- by enhancing the deposit money banks’ financial performance in Nigeria. Risk management efficacy is important when assessing the profitability of deposit money institutions since it can affect financial performance instability, bank liquidity, and eventually bank distress. This finding is in consonance with the study of Chechet et al., (2013); Egungwu and Egungwu (2018) and contrary to the study of Momoh and Ukpong (2013); Alhassan, Kyereboah-Coleman and Andoh (2014); Ghabayen (2012). Also, this study discovered a negative influence of asset quality on depos- it money institutions’ financial performance, and the outcome shows that as- set quality is statistically significant. The impact on Nigerian deposit money banks’ financial performance and, ultimately, the maximizing of shareholder wealth is greater the larger their non-performing assets are. Due to govern- ment support, efforts to collect on the enormous backlog of debts due by public firms have failed, which may be the source of Nigeria’s deposit banks’ high asset quality. This finding is in consonance with Francis, Hassan and Wu (2012); Li- ang, Xu and Jiraporn (2013); Momoh et al., (2013); Abata (2014); Adam (2014); Oyerinde (2014); Oyedokun (2019); Bouteska (2020); Barus (2017); but con- trary with the study of Adebisi and Matthew (2015); Kariuki, Muturi and Ngugi (2016); Ujunwa (2012); Khalid (2012); Muhmad and Hashim (2015); Thiagara- jan, Ayyappan and Ramachandran (2011); Kadioglu, Telceke and Ocal (2017). Board CharaCtEristiCs, assEt quality and finanCial PErformanCE… 7575  Conclusion And Recommendations Conclusion And Recommendations Based on the findings of this investigation, this study comes to the conclusion that board characteristics and asset quality have a substantial impact on the fi- nancial performance of Nigerian deposit money banks. This demonstrates that credit policy has an impact on profit before taxes, and as a result, banks must practice sound credit risk management in order to defend their assets and safe- guard the interests of their investors. Given how important asset quality is to financial performance, it is suggested that bank management must work hard to manage credit risk effectively or else financial performance will be unstable. Thus, the study also suggests that deposit money bank boards of directors be restructured in accordance with the corporate governance code and members of these boards should have diverse skills and experience to improve the finan- cial performance of these institutions. The study revealed that the board credits committee of banks have a posi- tive effect on their financial performance, as a result, the central bank should strengthen credit committee that will be responsible for overseeing the activi- ties of the loan officers as it is important that all lending officers and credit risk managers follow proper lending practices. Doing so can help improve the qual- ity of their assessments and inform policymakers when it comes to making de- cisions regarding loans approvals. However, board characteristics and asset quality were examined focusing on deposit money banks in Nigeria thereby excluding other financial institu- tions. Also, among board characteristics variables, board size and board credit committee were only considered. Hence, these constitute limitations and other researchers can explore that by examining other board attributes in other fi- nancial institutions.  Refernces Refernces Abata, M.A. (2014). 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