Risk Management And Financial Performance Of Deposit Money Banks In Nigeria

Project and Seminar Topics with material for Banking and Finance

Risk Management And Financial Performance Of Deposit Money Banks In Nigeria


Abstract


The study explored risk management and financial performance of deposit money banks in Nigeria. The study employed panel methodology and other econometric techniques such as hausman test, descriptive statistics. This study used secondary data in examining the association between risk management variables and financial performance of 10 deposit money banks quoted on the Nigerian Stock market. Results from the panel regression show a positive relationship between risk management and financial performance of money deposit banks. The study recommends that banks in Nigeria should augment their capacity in, liquidity risk analysis, and credit analysis and loan administration while the regulatory bodies should pay more attention to banks’ compliance to regulations of the Bank and other Financial Institutions prudential guidelines.


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 Introduction
  • 3.2 Research Design
  • 3.3 Population of the Study
  • 3.4 Variables and Research Model
  • 3.5 Measurement of Variable
  • 3.6 Apriori Expectation
  • 3.7 Hypotheses
  • 3.8 Method of Data Analysis

Chapter Four:

Results and Discussion

  • 4.1 Introduction
  • 4.2 Data Analysis
  • 4.3 Discussion of Panel Regression Result
  • 4.4 Hypotheses Testing

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One


Introduction

1.1 Background of the Study

Many financial institutions have either collapsed and or are facing near collapse because of badly functioned subprime mortgage lending to firms and people with bad and unreliable credit. Banking crises in Nigeria have shown that not only do banks often take excessive risks but the risks differ across banks. Most banks quality of assets has deteriorated as a result of significant dip in equity market indices. The CBN governor in 2009 maintained that some banks were faced with liquidity constraints. Thus their activities were reduced because of their response to the perceived risk of lending to each other making profits and returns to suffer. This led to liquidity and credit shortages and a significance loss of public confidence in banks andalso negatively affects the entire financial system and the economy. The fact remain that banks have a dominant position in developing economic financial systems and are engines of economic growth (King and Levine, 1993; Levine, 1997). Risk management is the quality control of finance. It is a broad term used in different senses in different organisations but basically it involves identification, analysing and taking measures to reduce or eliminate the exposures to loss by a business organisation. Frank Knight (1921), the most famous scholar to formalize definition of risk and make a distinction between risk and uncertainty. Holton, (2004) defines risk as situations where the outcome of a given action is unknown but the odds are measurable. Recent global economic crisis has revealed that, it is difficult for institutions to accurately capture the riskiness of their activities.

It is important to manage risks, rather than trying to hedge against risk, there is a strategic step to determine the risks to avoid, the ones to reduce or eliminate and those ones to exploit in order to take advantage of opportunities to achieve the objectives of the organisation. Increasing exposures to some risk is an integral part of business success and any entity that wants large rewards must be ready to take considerable amount of risk (Damodaran, 2017). For any business venture of which the DMBs are part of, Audu (2014) submitted that it is difficult to ignore risk altogether because without taking some level of risk, the returns from operations will no doubt be compromised and therefore Audu advocated avoidance of risks as much as it is feasible saying that the rational approach to risk, is at the very least to restrict exposure to it. Financial risks are subset to the overall firm risk. One of the main reasons for financial risk management is to reduce the instability of earnings and cash flow due to financial risk exposure (Dhanini, 2007). The reduction enables the firm to perform better forecasts (Vaughan & Vaughan, 2008). This would guaranteethe availability of sufficient funds in the company for investment and dividends payment (Sarkis, 1998).

Another reason for management of financial risks is to avoid financial distress and the costs connected with it (Triantis, 2000; Drogt& Goldberg, 2008). Lastly, the interest of management towards risk management may be directed to stabilizing earnings or keeping a constant tax level (Dhanini, 2007). Risk management can be structured, focussing either on minimizing volatility or avoiding large losses (Sarkis, 1998). Reduced instability in cash flows or earnings and prevention of losses allow better planning of liquidity needs (Eichhorn, 2004). The main aim of management of firms is to maximise expected profits taking into account its volatility. Risk management is important because organisations want to avoid low profits, which force them to seek external investment opportunities. When this happens, it results in sub-optimal investments and hence lower shareholders’ value since the cost of such external finance is higher than the internal funds due to capital market imperfections.


1.2 Statement of the Problem

Deposit money banks play a vital function in the economic resource distribution of countries. For survival and growth, deposit money banks need to be profitable. Beyond their middle man function, the profitability of banks has serious effects on economic growth. Good financial performance promotes high shareholders returns. As a result of this, there exists further investment thereby promoting economic growth. Also, poor financial performance of deposit money banks can lead to failure and financial crunch which have undesirable impacts on the economic growth, Ongore & Kusa (2013). Credit and liquidity problems may adversely affect the financial performance of a bank as well as its solvency if not properly managed. Credit risk management has been an essential part of the loan process in the banking sector. Deposit money banks continue to spend huge resources in credit risk management modeling with the objective of maximizing profits.

Unfortunately, existing research which investigated the effect of risk management on banks performance have produced mixed results. For example, scholars like Kithinji, (2010), Epure and Lafuente (2012) as well as others discovered that credit risk management negatively impact deposit money banks profitability. While Kuforiji (2008); Kolapo, Ayeni & Ojo (2012) holds that credit risk management has a positive relationship with banks performance. Also, several other studies have helped authenticate that credit risk management help banks improve on their profitability. Kargi, (2011), Felix and Claundine (2008), Al-Khouri (2011) amongst others found that credit risk, liquidity risk and capital risk are key variables that influence banks performance especially when profitability.

Conclusion from the review of extent literature clearly suggest that the actual relationship between risk management (credit and liquidity) and banks performance is yet to be settled and researchers do not necessarily split this risk factors into categories while embarking on finding a solution. It therefore creates a lacuna for a more recent empirical investigation to be tested in Nigeria, a country faced with so many recurring issues and recently faced recession which impacted virtually all the key sectors of the economy. This study seeks to establish the degree to which risk management (credit and liquidity risk) have impacted profitability of Nigerian deposit money banks.


1.3 Objectives of the Study

The major objective of this research is to investigate risk management and financial performance of deposit money banks in Nigeria.

The study will specifically seek to;

  1. Investigate the correlation between liquidity risk management and financial performance of deposit money banks in Nigeria.
  2. Investigate the correlation between credit risk management and financial performance of deposit money banks in Nigeria.

1.4 Research Questions

  1. What is the correlation between liquidity risk management and financial performance of deposit money banks in Nigeria?
  2. What is the correlation between credit risk management and financial performance of deposit money banks in Nigeria?

1.5 Research Hypotheses

  • Ho1: There is no relationship between liquidity risk management and firm’s performance
  • Ho2: There is no relationship between credit risk management and firm’s financial performance

1.6 Significance of the Study

In the theoretical contribution, the study will fill the knowledge gap on the relationship between risk management and financial performance in commercial banks. In addition to the above, the study can add more comprehensive knowledge to the readers in the financial sector. Another addition and contribution is that, the study will make the basis for other researchers who would wish to dig into further studies of the area.

From a practical area, the information in this research will offer a comprehensive guideline to bank managers, investors and other commercial banks employees, depending on the conclusions and results of this research study. Commercial bank managers could use the information and concentrate to improve banks’ performance by working on the risks in banks. Commercial banks can now better and allocate their resources in line with the position of risks.


1.7 Scope of the Study

The study covers the the effect of devaluation of Naira in Nigeria economy. The study covers the period of 10years from 2006 2015. The study will cover deposit money banks listed on the Nigerian stock exchange.


1.8 Limitation of the Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.


1.9 Definition of Terms

Risk

Risk can be fined as the future impact of hazardous actions that has not been eliminated in an organization.

Risk Management

Risk management consists of a series of well elaborated steps whose main objectives are to identify the risks, address, and eliminate risk items before they become either lethal to successful business organization or a major source of expensive rework of an organization processes.


1.10 Organization of the Study

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

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary, Conclusion and Policy Implications

5.1 Introduction

This chapter presents the summary, conclusions and recommendations of the study. These are presented in line with the objectives and findings of the study.


5.2 Summary of the Study

The study was undertaken to study risk management and financial performance of deposit money banks in Nigeria. This study used secondary data in examining the association between risk management variables and financial performance of 10 deposit money banks quoted on the Nigerian Stock market.


5.3 Conclusion

The result of the estimated coefficient of the variables non-performing loans, capital adequacy ratio, leverage ratio shows significant relationship with performance of deposit money banks but loan deposit ratio has no significant effect on firm’s financial performance in Nigeria. The result of this study indicates a significant direct relationship between risk management and financial performance of deposit money banks in Nigeria. Except for leverage (LEV) all other variables suggests a positive relation with the performance of the banks.

There is a significant and positive relationship between risk management and banks return on assets. This suggests that effective and efficient risk management strategy plays a determinant role in deposit money banks financial performance in Nigeria. Hence, improvement in risk management practice will yield increase returns for the banks thereby increasing deposit money banks performance. These risk factors are vital in estimating the performance of deposit money banks in Nigeria. Where a bank does not successfully control its risks, its performance will be unsteady. This depicts that credit risk and liquidity risk of banks has been responsive to policies channeled to Nigerian banks. Banks become more alarmed because loans are usually among the most unsafe of all assets and may threaten their liquidity level and lead to financial distress.

Better credit risk management and liquidity risk management results in better bank performance. Thus, it is of vital significance for banks to exercise prudent lending risk management to protect their assets and safeguard the investors’ wellbeing.


5.4 Recommendations

  1. Management need to be alert in setting up a credit strategy that will not negatively affects lending risk management of the banks.
  2. The bank management needs to know how credit and liquid policy affects the operation of their banks to ensure judicious utilization of deposits and maximization of profit.
  3. The central bank of Nigeria for policy purposes should frequently evaluate the lending behaviour of financial institutions.
  4. Based on the research discoveries, it is suggested that banks in Nigeria should augment their capacity in, liquidity risk analysis, and credit analysis and loan administration while the regulatory bodies should pay more attention to banks’ compliance to regulations of the Bank and other Financial Institutions prudential guidelines.
  5. Strengthening the securities market will have a positive impact on the overall development of the banking sector by increasing competitiveness in the financial sector. As a result banks remain under some pressure to improve their financial soundness.

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