Essential Of Financial Risk Management For Schools (A Case Study Of Higher Institutions In South Africa)

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Essential Of Financial Risk Management For Schools (A Case Study Of Higher Institutions In South Africa)


Abstract


The study explored essential of financial risk management for schools (a case study of higher institutions in South Africa). It focuses on how educational institutions identify, measure, monitor and manage the financial risks they are faced with and how the risk management strategy benefits the institutions. The main objective of the study was to study the nature and extent of credit and liquidity risks faced by Namibia Business School for the period between 2009 up until 2011. The study aimed to identify an effective risk management strategy to ensure the School’s competitiveness and sustainability. Research work is based on a case study approach where interviews and survey were used to gather primary data, and a mixed method approach was used for data collection, data analysis and interpretation. The study was explorative in nature. The major findings of the research pointed out that NBS has been experiencing difficulties in collecting revenue and has adopted the UNAM risk management policies. The results echoes that by developing and implementing a formal and integrated risk management framework, an institution will hold a dynamic tool that can serve as a road map for identifying and managing risk exposures. However, a more customized strategy including the review of governance structure, introducing risk procedures and methodology manuals as well as creating a better risk awareness culture amongst staff will yield better results than a wider framework.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Research Design
  • 3.2 Population of the Study
  • 3.3 Sample Size Determination
  • 3.4 Sample Size Selection Technique and Procedure
  • 3.5 Research Instrument and Administration
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis
  • 3.8 Validity of the Study
  • 3.9 Reliability of the Study
  • 3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Analysis of Data
  • 4.3 Answering Research Questions
  • 4.4 Test of Hypotheses
  • 4.5 Discussion of Findings

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • APPENDIX
  • QUESTIONNAIRE

Chapter One


Introduction

1.1 Background of the Study

Risks are associated with every human undertaking. This means, therefore, that risk identification and mitigation is prominent in the management of business projects. Especially so in the era of increasing globalization and competition (Bowers and Khorakian, 2014), identifying, analyzing, assessing, treating, monitoring and communicating risks in gaining unfettered prominence as an imperative for continuous improvement of the decision-making process. Indeed, risk management is integral to good management and institutional governance (Aggarwal, Erel, Ferreira, and Matos, 2011) since with minimal risks organizations can exploit opportunities with minimum losses (Reason, 2016).

For Pagach and Warr (2011), the principal goal of risk management points to the enlargement of shareholders’ value. However, within the Institutions of higher learning, the identification of risk factors has not been widely embraced (Basch, 2011; Arum and Roksa, 2011; Brown, Bull and Pendlebury, 2013) despite the obvious fact that academic performance faces numerous risks. In developing countries, despite increased government funding of institutions of higher learning like colleges and universities, academic performance remains very low (Akoojee, 2009; Fisher and Scott, 2011; Allais, 2012; Matsolo, 2015).

With the level of investment by the government not matching the throughput rate within the Higher education and training (HET) sector, the question which remains unanswered pertains to the performance risks faced by HET institutions in developing countries. The prevalence of such risks if untreated could imply wastage of public funds and more so a failure to meet the developmental needs of the developing countries. This paper aims to establish the performance risks encountered in the HET.

This endeavour should culminate in a framework of options to limit such identified risks. The paper is organized as follows: Firstly, we trace the risks from a theoretical basis. Secondly, we discuss the methods used in this study to discover the inherent risks to performance in the HETIs. Thirdly, the results are presented and discussed. Lastly, conclusions and recommendations for limiting the performance risks are offered.


1.2 Statement of the Problem

According to Froot (2007), cash flow, capital and budgetary issues, and return on investment constraints present difficult to circumvent operational risks to any project. As well, institutions are also at the mercy of contractual and legal risks such as changing requirements (Williams, Carver, and Vaughn, 2006; Rahman, Razali, and Singh, 2014), market-driven schedules (Saleem and Abideen, 2011) and government regulation (McNeil, Frey and Embrechts, 2015). Other institutional risks may be associated with the nature and calibre of staff employed Literature (Corey, Corey, Corey and Callanan, 2014; Mark and Harless, 2010; Webster‐Stratton, Jamila Reid and Stoolmiller, 2008) is indeed explicit on the impact of risks such as staffing lags, experience and training problems, ethical and moral issues, staff conflicts, and productivity issues on the performance of institutions. In turn, many other resources for example, unavailability or late delivery of equipment and supplies (Waters, 2011), inadequate tools, inadequate facilities and distributed locations (Klibi, Martel, and Guitouni, 2010), unavailability of computer resources (Kaur & Rai, 2014), and slow response times (Kleindorfer and Saad, 2005), are potent in thwarting the efforts of institutions in terms of academic support (tutoring, linked courses, identification of at-risk students, advising structure and availability, study groups, course availability, performance feedback, student handbook, program level, program orientation).

Extensive research indicates that institutions are faced with different types of risks such as financial risk and business risk, and apply different models to mitigate the risks. Financial risk, (credit and liquidity risks) have devastating effects on the 6 operations of institutions. According to the Bank of International Settlements (BIS, 2006), the effective management of risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of any institution. NBS as an institution is exposed to credit risk and liquidity risk. At the moment, NBS does not have a strategy to manage its credit risk as well as liquidity risk. The absence of risk management strategy exposes the School to not being able to identify, measure, and manage its risks, including the risks that can be effectively managed by the School. Crafting a financial risk management strategy will enable the School to keep abreast of the risks that it is exposed to. This will enable it to identify the risks, measure the risks and use appropriate mechanisms to manage the risks. To determine the nature and extent of credit risk NBS was exposed to, measures such as the method of payment of tuition fee during studies, late payment or delay in payment of tuition fee, NBS tuition fee collection and outstanding dues collection policy and strategy, NBS internal policies and procedures, staff motivation and morale in respect of the above and pressure on management to manage risk were analysed. Further, to determine the nature and extent of liquidity risk NBS was exposed to, measures such as creditors and suppliers’ payment policy, suppliers’ records 7 (accounts statements), delay in meeting creditors’ obligations, liquidity ratios and current ratios were analysed.


1.3 Objective of the Study

The main objective of this study is to investigate the essentials of financial risk management for schools (a case study of higher institutions in South Africa. Specific objectives of this study include:

  1. To study the nature and extent of credit risks and liquidity risks the NBS is exposed to;
  2. To identify and assess the levels of risk exposure at the NBS.
  3. To examine the identification and development of a risk management strategy to mitigate the identified risks.

1.4 Research Questions

  1. What is the nature and extent of credit risks and liquidity risks the NBS is exposed to?
  2. What isthe levels of risk exposure at the NBS?
  3. What is the identification and development of a risk management strategy to mitigate the identified risks?

1.5 Significance of the Study

The study was conducted for both academic and professional purposes and thus has significant contributing factors. The study enabled the researcher to gain academic knowledge in the area of risk management specifically with regard to decision making when it comes to financial risk management strategies as well as gain general business experience. This study contributed to the knowledge of financial risks faced by educational institutions and can be used as a point of reference by future researchers. The outcomes of this research will benefit NBS and will highlight the implications and benefits of having a risk management strategy in place and will enable NBS’s management to make informed decisions. The study will also benefit policy makers, specifically in institutions of higher education and in Namibia in particular, when it comes to financial risk management decision making. Given the above scenario, some personnel at the NBS were of the opinion that by developing financial risk management strategies for the School, more synergy can be gained and activities can be better managed to improve the financial position of the School while some others were undecided. This is a general feeling of the management in decision making within the institution. It had not been verified as to whether developing a financial risk management strategy is the best way forward. The uncertainty of the strategy remained a worrying situation to the researcher and this has motivated the researcher to conduct a research of this sort in order to find out whether the development of financial risk management strategy will be in the best interest and can add economic value to NBS, and will enhance and strengthen decision making by the NBS Board of Trustees, management as well as staff with regards to effective management of credit risk and liquidity risk NBS is exposed to


1.6 Scope of the Study

Apart from the limited scope, that higher institutions in South Africa alone being the subject of study and the time limit; this study also faced the following challenges and limitations. Risk management and its strategies are involving andinstitution-specific. As a result, most institutions including business schools are still in the process of drafting strategies and have fragmented activities, which are conducted by financial institutions. This puts a limit on the literature available on the specific subject. In most jurisdictions, the function of risk management falls within the ambit of the Audit department, whose structures are usually different from those of conventional institutions. This again puts limitations on comparing functions amongst responding institutions. The time provided in which to complete the research was also limited. The quality of the outcome of the analysis also depended upon the timely responses obtained from correspondents. 10 Since the study was based on a case study, it limited generalisation of the results. The study entailed deep exploration into the financial information of NBS between 2009 and 2011, to assess the nature and extent of credit risks and liquidity risks that the School was exposed to. The study period was limited mainly because, prior to the official launch in October 2008, the School offered only one program. The School until then did not meet the standard requirements of a business school. In addition, the finance function at the School was outsourced and only audited financial information for 2009 till 2011 could be available. A major limitation in conducting this study was accessibility of individuals with relevant and required information. Finally, the researcher encountered problems with regards to obtaining information in the format the study required. Information had to be processed in the form useful to enable to analyse the information and be able to draw sound conclusions. The researcher also did not get adequate support fromstaff of higher institutions in South Africa with regards to obtaining information and as a result had to limit the study to limited available information. The confidential nature of the information, especially on the shortcomings of internal processes, was an inhibiting factor.


1.7 Limitation of the Study

Apart from the limited scope, that higher institutions in South Africa alone being the subject of study and the time limit; this study also faced the following challenges and limitations. Risk management and its strategies are involving and institution-specific. As a result, most institutions including business schools are still in the process of drafting strategies and have fragmented activities, which are conducted by financial institutions. This puts a limit on the literature available on the specific subject. In most jurisdictions, the function of risk management falls within the ambit of the Audit department, whose structures are usually different from those of conventional institutions. This again puts limitations on comparing functions amongst responding institutions. The time provided in which to complete the research was also limited. The quality of the outcome of the analysis also depended upon the timely responses obtained from correspondents. 10 Since the study was based on a case study, it limited generalisation of the results. The study entailed deep exploration into the financial information of NBS between 2009 and 2011, to assess the nature and extent of credit risks and liquidity risks that the School was exposed to. The study period was limited mainly because, prior to the official launch in October 2008, the School offered only one program. The School until then did not meet the standard requirements of a business school. In addition, the finance function at the School was outsourced and only audited financial information for 2009 till 2011 could be available. A major limitation in conducting this study was accessibility of individuals with relevant and required information. Finally, the researcher encountered problems with regards to obtaining information in the format the study required. Information had to be processed in the form useful to enable to analyse the information and be able to draw sound conclusions. The researcher also did not get adequate support from staff of higher institutions in South Africa with regards to obtaining information and as a result had to limit the study to limited available information. The confidential nature of the information, especially on the shortcomings of internal processes, was an inhibiting factor.


1.8 Definition of Terms

Risk:

The possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed.

Risk Management:

The identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate eventsor to maximize the realization of opportunities.

Management:

The administration of an organization, whether it is a business, a non-profit organization, or a government body. It is the art and science of managing resources of the business.

School:

An educational institution designed to provide learning spaces and learning environments for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is sometimes


1.9 Organisations of the Study

This research work is categorized in five chapters, for easy understanding, as follows.

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), background to the study, statement of problem, objectives of the study, research questions, significance of the study, scope and limitation of the study, definition of terms.
  2. Chapter two encompasses the conceptual review theoretical review and empirical reviews on which the study is based.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Summary of Findings

In contrast to the remaining respondents (26.3%), the majority of respondents (73.7%) said they had no trouble paying their tuition. However, 26.3% said they had some issues. The findings demonstrated that the NBS’s approach of fee payment was advantageous to students and did not pose a substantial problem for them.

According to the findings shown in table 4.8, the majority of respondents (63.2%) thought NBS needed to make improvements to the way students pay their tuition. While 31.6% of respondents remained neutral, 5.23% of respondents disagreed with the consensus and said the NBS method of paying tuition was a good idea. As a result, it became clear from the figures in table 4.8 that NBS must enhance its system for student tuition fee payment as a measure to reduce financial risk.

According to Table 4.9 above, a sizable majority of respondents (68.4%) felt that the possibility of payment default has an impact on other service deliverables at the NBS. A third (31.6%) of the respondents, who strongly agreed that the possibility of payment default has an impact on other service deliveries at the NBS, added to this argument. The possibility of student fee default was generally acknowledged by all respondents as having an impact on other NBS service delivery.

The results showed that more than three fourth (84.2%) of the respondents remained neutral on the issue whether NBS faced liquidity problems. Only 10.5% of the respondents agreed that the NBS faced liquidity problems. Further, 5.3% of the respondents disagreed with the opinion of other respondents and they believed that the NBS was actually not facing liquidity problems. May be the students were not fully aware about the internal problems of management NBS and as such could not grasp the liquidity problems faced by NBS.

On the issue whether the NBS strategy of debt collection was appropriate or not, majority (63.2%) of the respondents did not express themselves on the matter and remained neutral. But remaining about one third (36.8%) respondents disagreed that the NBS strategy of debt collection was appropriate. The results thus showed that in the opinion of respondents the NBS strategy of debt collection was not appropriate and exposed it to liquidity risk.


5.2 Conclusion

It is concluded that the study filled the gap highlighted by prior studies as it contributes to the identified gap on risk management and risk governance empirical studies in the South African context and the higher education sector specifically. Thus, provides unique insights into the application and disclosure of risk management practices in the education sector and submits an understanding of the risk governance maturity in the South African context..

Lastly, the study provides an interesting view on the impact of social events, such as protests on risk management practices employed and further supports the notion of how legislative accounting practices echo stakeholder, societal expectations, and the potential to transform organizational practices.


5.3 Recommendation

The recommendations made on risk management strategy to mitigate the identified risks at the NBS, based on the findings from the survey of opinion of the respondents, data analysis and discussion with the officials, are as under:

  1. The NBS management is urged to constantly send reminders to students to pay tuition fees on time and further impose penalty on the defaulters. It may be stated that among the respondents 36.8% believed that it was important for the NBS to give reminders to students to pay up the tuition fees on time and another 36.8% of the respondents considered that imposing penalties will make the students pay tuition fees on time.
  2. It is recommended that the NBS should review their method of payment of tuition fees, since the current method exposes the institution to risk. This sentiment was supported by majority (52.6%) of the respondents who agreed that the method of payment of tuition fees at the NBS exposed the institution to risk.
  3. It is recommended that as the NBS method of payment of tuition fees was weak it needs improvement. This was supported by about half (47.4%) of the respondents who agreed that the NBS need to improve on the method of payment of tuition fees by the students.
  4. It is recommended that NBS should re-evaluate the UNAM Policy and Procedure manual that they have adopted and implemented and align it to NBS operations, processes and structures.
  5. It is recommended that NBS should strive to improve on its financial management strategies in order to effectively and efficiently manage its financial resources in terms of matching the assets and liabilities, to ensure financial sustainability and competitiveness. In the same vein, it is also recommended that the NBS should be innovative in exploring other means of generating additional funds to support its activities.
  6. It is recommended that NBS should undertake a thorough review of the UNAM Finance policy and procedure manual adopted by it, to customize it to its structures, processes and operations. The reviewed Finance policy and procedure manual should then be adopted by the NBS.
  7. The NBS should develop and a formal and integrated risk management framework, including the risk management policies and procedures.
  8. The NBS should create a risk awareness culture amongst its staff and stakeholders and review its governance structures.

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