Risk Management In Commercial Bank An Appraisal (A Case Study Of UBA Nig. Plc, Owerri)
This study is primarily designed to find out the effectiveness of risk management in the modern banking industry with particular reference to some selected commercial banks. Statistically evident one (1) of the aforemost problems confronting risk attributed to lack of education and lack of adequate knowledge of risk management processes. Another factor is the poor economic and technological development based on the above mentioned problems, it is the alm of this study to look into the importance of risk management in the banking industry as well as its contribution to the development of the economy.
To this end, effort would be made x-ray some factors considered responsible for the effectiveness of risk management in present day banks. The satisfied technique to be adopted in this study will be chi-square (x2) method of analysis this data to be collected in the course of the study will presented, analyzed and interpreted having the started approaches in mind.
In view of this, the finding will be such that risk management department will be established in banks to make control more effective. At the end, the conclusion will be such that the availability of risk management in modern banks is very essential
Table Of Contents
- Title page
- Approval page
- Table of contents
- 1.1 Background of the study
- 1.2 Statement of the problem
- 1.3 Objectives of the study
- 1.4 Research question
- 1.5 Significance of the study
- 1.6 Scope of the study
- 1.7 Limitations of the study
- 1.8 Definition of terms
2.0 Literature Review
- 2.1 Introduction
- 2.2 Types of banking risks
- 2.2.1 Investment risk
- 2.2.2 Loss of confidence risk
- 2.2.3 Liquidity risk
- 2.2.4 Farming risk
- 2.2.5 Fraud risk
- 2.2.6 Operation risk
- 2.2.7 Off balance sheet risk
- 2.2.8 Risk identification techniques
- 2.2.9 Risk evaluation
- 2.2.10 Risk avoidance and reduction
- 2.2.11 Risk transfer
- 2.2.12 Risk retention
- 2.2.13 Risk financing
- 2.2.14 Off balance sheet risk
3.0 Research Design and Methodology
- 3.1 Introduction
- 3.2 Research design
- 3.3 Sources/Method of data collection
- 3.4 Population and sample size
- 3.5 Sample techniques
- 3.6 Validity and reliability of measuring instrument
- 3.7 Method of data analysis
4.0 Presentation and Analysis of Data
- 4.1 Introduction
- 4.2 Presentation of data
- 4.3 Analysis of data
- 4.4 Interpretation of data
5.0 Summary, Conclusion and Recommendations
- 5.1 Introduction
- 5.2 Summary of finding
- 5.3 Conclusion
- 5.4 Recommendations
1.1 Background Of The Study
William (1990) defined risk management discipline whose goals is to protect the asses and profit or an organization by reducing the potential for loss before it occurs and financing through. Insurance and other means potential exposures to catastrophic loss such as acts of God, human error on court judgment. However in practice, the identified exposure through elimination and or reduction and financing the remaining exposures so that the organization in question in the event of a major loss can continue to function without server hardship to its financial stability.
The management for risks in firms is relatively new and as a specialist, management technique has its origin in the United States of America dating back to early igbo. This is so because of the vast technological development the large concentration of values and increasing use of highly sophisticated equipment and products which become permanent features of the 1960’s and 1970’s (Wuther, 1991).
Nevertheless, the level of awareness is still low in developing countries, infact, it was because of the accident, which happened in November 1984 in Blopal India that led to the subject of risk management receiving some attention in most developing countries.
The months following the Blopel incident, the United Nations conference on trade and financial relation to trade (CITT) met in February 1985 in Geneva and passed a resolution requesting that the (UNCTAL) secretarial undertake a study urgently on the applicability of modern risk management techniques to the commercial and industrial enterprises located in developing countries based on this resolution a publication entitled, “the promotion of risk management in developing countries” was published in January 1989, owing to lot of effort to promote the techniques of modern risk management.
For instance in Nigeria this was first demonstrated by vice admiral Augustine Alkhoma (Rtd) during the international conferences held in Lagos under the auspicos of the Nigeria faculty of risk management hen he stated “Nigeria at present loses more than N10billion of her human and material assets annually due to the preventing low level of risk awareness and lack of effort directed at loss prevention and risk management”, these loses amount to about 10 percent of the nation, gross domestic product (GDP) and must be allowed to continue the concept of risk management, the banking industry is one of the industries that operates in rapidity changing regulatory and economic environment in addition, sequel to the introduction of structural acknowledgement program (SAP) in the year 1986, the number of banks in the country rose to banks continues to increase this has brought a heavy competitive pressure to the banks and invariably the increase of risk.
As competitive pressure opportunities to offer nets products, compete in expanded geographical market and consolidated operations increases the risk faced by the banks also increases. Increases in the word of Koch (1992), “Banks must be able and willing to change or they will disappearing.
This financial management of commercial banks involves selecting the portfolio and misappropriation of products and services offered by a balanced expected returned within assumed risk the greater the expected returns will be.
1.2 Statement Of The Problem
Through the phenomenal growth of banks in the Nigeria financial institution is seen as a healthy development in the economy, it has also led to increase in crises in the banking industry, he management of banking this era of technology is a very complex affair that involves the sue several management tools, both human and material in order to achieve the corporate goals of bank, the managers of banks exercise a number of management functions, which amongst others includes the management of risk, this is probably the reason why modern risk management functions techniques devised to enable organization to meet up with the ever increasing complex and high value risks to which modern bank operator are exposed the major aim of all bank is to maximize profit to actualize the goal the organization engages in alls ort of complex economic activities which if unforeseen by the organization present a danger. It is therefore imperative that bank seek to identify areas in operation which could constitute potential severity of such an occurrence with a view of ensuring the continuity of its operation.
In the face of increasing competition bank and tend to focus more on how to increase their market share so as to remain viable in the industry sometime with ought to follow and as a result the management of risk exposures in these thanks remains under developed leaving room for losses that are capable of paralyzing their corporate existences the application of professional risk management principles to the identification measurement and control of personal and corporate loss exposures is vital with the ultimate objective of protecting the assets, earning, persons and liabilities of the bank concerned at minimum cost with maximum potential benefits.
In Nigeria for instance, risk management is relatively new not withstanding the fact that risk management, risk assessment, risk control and risk financing are as old as man is, however, modern risk management provide a new approach to these ancient practices which is gradually and slowly going ground. Through the activities of insurance companies lack of adequate knowledge of risk management has limited it’s application in the banking industry.
In view of the present level of economic and technological in Nigeria bank is poor compared to the developed countries of Europe and this is attributed to lack of education of risk management processes in the country.
There is therefore the need to developed risk management consciousness in banking industry. One of the yard stick for measuring the level of economic development is the success recorded in the banking industry, it is therefore imperative that appropriate structure in today banking industry.
Most bank policies have not giving prominence to the subject of risk management as regard the prevention, elimination and minimization of losses.
Finally in the banking industry, the risk manager is not considered important and his role is not well appropriated the overall effect of the above could be detrimental to the banking sector as a whole.
1.3 Objectives Of The Study
The overwhelming empirical evidence of distress in the financial industry has increased public awareness of existing and emerging problem in the banking industry. It has lead to destructive deposit one some less desirable name in the industry. This has imposed tremendous challenges on the bank to effort necessary control measures to improve their capital base, hence, the objective of this study include:
- To investigate into the effectiveness of risk management in the banking industry.
- To assess the level of identification of the risks factor in the banking industry
- To proffer possible strategies to further heighten the level of risk factor identification in the banking industry.
1.4 Research Questions
- What is the level of identification of the benefit of risk factor in the banking industry?
- Is there risk management department in the banking industry?
- To what extent does ineffectiveness of risk?
- What is the rate of occurance of banking risks?
- How effective is risk management in the banking industry?
- What are the step taken towards ensuring adequate provision for risk in the industry with a view to minimizing or eliminating risk exposure have on the total loss made by banks.
1.5 Significance Of The Study
The focus of the study is the banking industry in Nigeria. One of the legacies the structural adjustment program (SAP) left on its trail is the mostly of bank in the Nigeria financial system.
The phenomenal growth of bank was unitary been as a healthy development in the economy, I was believed to stimulate healthy competition in the money market and encourage even spread of resource in the economy.
However, the proliferation of bank has had carried along with it’s sporadic mortage of bed boys, incompetent and inexperience hands into the banking system with the result of increased risk exposure such as fund risk, market liquidity risk and credit risk, consequently, risk management take the view that is firm exposed to risk in a variety of way and in management it comes, it will not double lead to financial losses, risks is therefore viewed in its wider sense and not limited to only insurable risks, we however, notice that is our society, insurance is the most common from risk management whereas it is only a part of the entire risk management process.
In the absence of appropriate risk management structures, banks are likely to suffer huge financial loss, which may lead to distress in the system and lower the banking habits and the confidence of the people.
1.6 Scope Of The Study
This study analysis in general concerned with the effectiveness of risk management in Nigeria commercial banking operation is done in such a way as to enhance effectiveness in the sector.
This study is narrowed down to enable the researcher have a sample that could be effectively studied bearing in mined the cost involved. The study areas cover fair commercial banks as follows:
- Bank of Nigeria
- United Bank for Africa
- Access Bank Internation Plc
1.7 Limitation Of The Study
In carry out this study many factors will limit the successful achievement of the main aim of the research.
The major limitation will be that risk management department does not exist in most of them to be interviewed banks, besides, the willingness of most banks top management to respond to the research questionnaire appropriately.
1.8 Definition Of Terms
It is an integral part of resources of every business concern. The possibility of something happening in the future.
Doubtful of something, being uncertain not to be depended on.
It deals with the principles employed for the effective management of all the risk facing us.
It involves the implementation of risk management policies and strategies to ensure that there is uniformity for all banks.
This is an attempt to prevent the risk from occurring by outing some specific strategies that meet the objectives of its risk management.
This involves financing plans with appropriate provision for catastrophes in case of occurrence.
5.0 Summary, Conclusion And Recommendation
This chapter tries to make accurate summary of finding and precise conclusion of the research study as well as make necessary recommendation in relative to the research study.
5.2 Summary Of Findings
This study has revealed some significant results that stand to be very useful for consideration in risk management policy of any bank. The findings are summarized thus:
- The low level of awareness of risk management among junior staff in the bank is a pointer to the fact that bank management has regulated the junior staff to the background thus, considering them unimportant in any risk controlling measures taken by them.
- It is also evident that those who have been long ins ervice were more aware of the risk facing banks. Thus, showing that the identification of risk factor in the banking industry is dependent on the length of service and position of staff.
- Non-existence of risk management department in the banking industry has shown that the modern concept of risk management has not gained ground among banker.
- Despite the fact that there is no risk management department in the banking industry, risk identification measures and control of modern risk management has gained ground in the banking industry as those interviewed were only taking about credit risk, which is only an integral part of the whole risk, which risk management is concerned with. The implication of this is that most of the banks rely fully on insurance protection.
- It was also evident in the findings that improper risk management has contributed to the distress in banking sector.
- The role of risk manger is not well appreciated, thus there is no special risk manager to adapt and apply modern risk management principles in such away that bank goals are achieved.
- Improper risk management affects the profitability level of banks in general.
- For any financial institution that expects to survive in the modern business environment with the increasing volume of risk, exposure a sound risk management policy should policy should be put in place. However, it was evidenced by the study that no such policy is in place.
The purpose of this study was to x-ray into the effectiveness of risk management in the banking industry modernization and industrialization of the cities and urban centers have led to new types of risk, which because of their complex and sophisticated nature required more scientific methods of management.
The position in banking industry today is that the environment in which modern banking business operate is becoming more complex and complexity in the size and nature of the risk facing banks.
The study revealed that management in the banking industry, since of the modern risk management on the profit margin of the banks has been on the increase. It was revealed in the study the effective lines of communication as regards to effective risk management between senior management team and junior staff is lacking.
This has resulted to staff involvement in modern risk management in the banking industry playing a reactive role in less assessment, control and financing instead of playing forward looking role. The low level of risk awareness in the banking industry testified to this fact. Therefore, for sound risk management practice in banking industry, there must be an integrated and systematic approach to risk analysis and treatment.
From absence of risk management department and risk manager in banking industry as revealed by this study, we infer that appropriate modern risk management policies, process and procedures that should eliminate, prevent or reduce all forms of risk and losses including measures designed to ensure the safety of banker’s assets are not in place.
Finally, risk management in banks should focus first on reducing or minimizing risks through sound administrative and operational practices and sound controls and the focus on what risks the institution will.
- Take of fully
- Insure down to a deductable level or
- Cover fully, eliminating and residual risk
Based on the findings of this research, the following is being suggested and recommended
- Risk management department should be established in banks. To make risk control more effective.
- It is obvious that the manager is the dynamic life-giving element in every business. Without his leadership, the resources of production. Therefore, the services of risk manager are highly needed to manage the risk management department.
- Periodic interviews and inspections should be initiated from time to time to assess the effectiveness of risk management policy that was out in place by the management and to ascertain how aware staffs are about the risk facing bank.
- The establishment of a sound risk management policy is very vital and should be carefully though out and thoroughly explained and understood by management and everyone associated with its execution.
- Instead of relying fully on insurance, which has become extremely expensive for certain types of risks, the functions of risk manager, should include constantly reviewing financial data and controls to seek ways to reduce ordinary risks and minimizing the dangers to the institution of accidental and extraordinary loss situation.
- An effective line of communication as regards of risk management must be established throughout the organization. This may include preparation of brief annual and risk management policy schedule to enhance risk aware among staff and to initiate them on the risk management may also require training, seminar, conference and workshops being organized on a department basis using films and other appropriate aids.
- In addition to establishment of a sound risk management policy designed to guarantee adequate protection of the banks assets. Management should take appropriate measures to ensure that the desired objective is achieved.
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