Abstract
Customers of the banks
expect their bankers to provide them with loans and advances to make up any
short fall in their funds requirement for transactional motive. This project is
sub-divided into five chapters, which focuses on risk management in Nigeria Banking
Sector. Questionnaires were distributed to collect the relevant information
from the respondents, percentage and chi-square method were employed and
hypotheses testing was carried out, it was discovered that there is risk in the
bank sector which enabled the researcher to conclude that there is risk in bank
lending and because the rules of lending are not often followed when granting
credit facilities to their customers. It was however recommended that there is need to employ more competent staff to the risk
management department.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract vi
Table of Contents vii
Chapter
One: Introduction
1.1 Background to the Study 1
1.2 Statement of Problem 6
1.3 Research Questions 8
1.4 Objectives of the Study 8
1.5 Statement of Hypotheses 9
1.6 Significance of the Study 9
1.7 Scope of the Study 10
1.8 Limitations of the Study 10
1.9 Definitions of Terms
11
Chapter Two: Review of
Related Literature
2.1 Introduction
13
2.2 Definition of Risk Management and Financial
Management 13
2.3 Risk in Financial Services 18
2.4 Risk Management Strategies 25
2.5 A Taxonomy of Financial Institutions
Services and Risks 33
2.6 Requirements for Effective Risk Management
Techniques 46
2.7 Management and Control of Credit Risk Unit 51
2.8 Management and Control of Liquidity Risk 52
2.9 Risk Identification and Credit Risk Operations 53
2.10 The Effects of Risk Management for Providing Effective Strategies
for Financial Management 57
Chapter Three: Research
Method and Design
3.1
Introduction 61
3.2
Research Design 61
3.3
Description of Population of the Study 61
3.4
Sample Size 62
3.5
Sampling Technique 62
3.6
Sources of Data Collection 62
3.7
Method of Data Presentation 65
Chapter
Four: Data Presentation, Analysis and Hypothesis Testing
4.1 Introduction 66
4.2 Presentation of Data 66
4.3 Data Analysis 66
4.4 Hypotheses Testing 77
Chapter Five: Summary
of Findings, Conclusion and Recommendation
5.1 Introduction 78
5.2 Summary of Findings 78
5.3 Conclusion 79
5.4 Recommendation 80
References 82
Appendices 86
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
Banks are germane to economic development through
the financial services they provide. Their intermediation role can be said to
be a catalyst for economic growth. The efficient and effective performance of
the banking industry over time is an index of financial stability in any
nation. The extent to which a bank extends their operation to the public for
productive activities accelerates the pace of a nation’s economic growth and
its long-term sustainability (Kolapo, Ayeni & Oke, 2012). In the 21st
century business environment is added multifaceted and intricate than ever. The
majority of businesses have to trade with uncertainties and qualms in every
dimension of their operations. Without a doubt, in the present-day’s
unpredictable and explosive atmosphere all the banks are in front of a hefty
risks like: credit risk, liquidity risk, operational risk, market risk, foreign
exchange risk, and interest rate risk, along with others risks, which may
possibly intimidate the survival and success of the bank’s Corporate
Performance. The Nigerian banking industry has been strained by the
deteriorating quality of its risk related assets as a result of the significant
dip in equity market indices, global oil prices and sudden depreciation of the
naira against global currencies.The poor quality of the banks’ loan assets
hindered banks to extend more credit to the domestic economy, thereby adversely
affecting economic performance. This prompted the Federal Government of Nigeria
through the instrumentality of an Act of the National Assembly to establish the
Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a
lasting solution to the recurring problems of non-performing loans that
bedeviled Nigerian banks (Kolapo, Ayeni & Oke, 2012).
In the last few years, Nigerian banking industry
suffered an historic retrogressive trend in both profitability and
capitalization. Just 3 out of 24 banks declared profit, 8 banks were said to be
in ‘grave’ situation due to capital inadequacy and risk asset depletion; the
capital market slummed by about 70 percent and most banks had to recapitalize
to meet the regulatory directive. This drama in the banking sector eroded
public confidence in banking and depositors funds aggregately dropped by 41% in
the period. Possibly due to financial liberalization and globalization, the
fact is there has been a reckless abandonment of the essentials of managing
risk in times of economic boom and recession; the volatility of bank earnings
has been under-rated by bank managements. The central monetary authorities also
impacted negatively on stability of the sector. The auditing exercise was a
very good one but the sanctity and policy implementation mode was bad
considering the nature of the Nigerian economy. Basically, bank objectives
revolve around 3 directions: profitability, growth in asset and customer base.
Aremu, Suberu and Oke (2010) pointed out that the major problem of bank
management is the mis-prioritization of short term goals over its long term
objectives. While the profitability centres on the quality of short term
reprievable assets and liabilities, net worth expansion which is the equity
capital, is a function of total asset and liability. In Nigeria, it has been
observed that most bank managers have focused more on profitability (which
usually is a short term objective), with little attention on risk managing the
quality of assets which has better impact on the long term sustainability of a
financial institution. The risks that are faced by businesses can be categorized
into financial and non-financial risks. Both of these types of risks are very
vital in order to safely run any business.
Sadaqat, Akhtar and Ali (2011) also scrutinizes
credit risk having its financial nature and operational risk with its
non-financial nature in context to Nigerian Commercial Banks, as financial
market of Nigeria is among volatile markets of the world which is filled with
anonymity and escapade performances. The recent economic crisis has focused
attention on risk management, but managing risk is all about achieving
objectives (Woods, Kajüter, and Linsley, 2008; Van der Stede, 2009). Senior
managers in particular, are expected to build sustainable performances: create
value at acceptable risk levels over time (Calandro & Lane, 2006). To this
end, they should be clearly aware of the multiple sources and types of risks
(CIMA, 2007). A stronger focus on risk in performance reports addressed to
senior managers can address such expectation. Incorporating risk into
performance management processes can foster a better understanding of the
overall organisational risk exposure and improve business results. The way in
which senior managers are made aware of risks via top management reporting is
however an open ground where different professions and processes may find a
role. On the one hand, the reporting of high level risk information is
considered a constituent element of enterprise-wide risk management (ERM)
frameworks. These attempts to provide an overview of crucial business risks,
integrating traditional, function-specific risk management efforts, for example
labour safety and information system security. This reporting can include a
range of different information (Lam, 2006): qualitative information such as
objectives at risk, audit findings and escalation of particular events or
quantitative data such as early warning indicators, key risk indicators (KRIs)
and financial risk measures, for example value at risk (VaR). On the other
hand, it is argued that innovative performance management frameworks may
contribute to foster senior managers’ ability to oversee business risks (CIMA,
2007). In fact, frameworks such as the Balanced Scorecard (BSC) try to overcome
the shortcomings of traditional accounting indicators by means of a balanced
set of non-financial performance measures. These allow an early detection of
weak signals from the environment and provide a more timely and long-term
oriented view of the business (Kaplan & Norton, 2001). The use of such
frameworks can help signal that some risks related to an item exist and will
eventually cause poor financial performances.
1.2
Statement of Problems
The Nigerian Commercial Banking industry has
experienced series of problems right from the early 30s down to the middle of
the first decade of the new millennium. In 1930 for instance, 21 banks failed.
In 1958 when the Central Bank of Nigeria was founded, about 9 banks failed.
Still in 1989, about 7 banks failed. In 2006, the numbers of banks were reduced
to 24 from 87. As if it is not enough, the number continued to fluctuate from
25 to 24 and so on. The most recent record of banks failure in Nigeria was 2011
when 3 banks were acquired by the Asset Management Corporation of Nigeria
(AMCON). Perhaps this problem is subject to recurrence. The question is: does
it mean that these banks are not managing their risks at all; or is it that
they are managing them poorly?
It
is bewildering indeed when one begins to examine the Nigerian scenario of the
financial crises; it is incomparable and sometimes very strange! Another
question that comes to mind is why it is difficult for these Banks to find a
lasting solution to this seeming customary problem in the industry. The study
therefore attempts to assess the risk management strategies obtainable in the
commercial Banks in Nigeria. The consequences of bank failures are numerous and
very unpalatable, not only to the depositors but also the investors, the
general banking public and indeed, the entire economy. The regulators and
operators have also not had it easy when financial institutions collapse. Bank
failures, in general, impair financial intermediation and efficient allocation
of resources. They retard individual well-being and economic progress.
1.3
Research Questions
The following are the research question for the
study:
1.
To what extent has government
intervened in the financial institution in order to stop or reduced risk?
2.
Has inadequate collateral security
causes financial risk?
3.
Does fund diversion have any effect on
financial institution?
1.4
Objectives of the Study
To
determine and appraise of banking industry has being in distressed state due to
poor management risk firms that has huge profit in response to these commercial
banks in Nigeria have seen the need to embark on the risk management and ways in which risk
can be reduced or stopped.
1. To
investigate the extent to which government has intervened in financial
institution in order reduces risk in banks.
2.
To highlight the rate at which
inadequate collateral security increase the risk management.
3.
To determine whether risk management has
any effect in financial organization.
1.5
Statement of Hypotheses
The
following hypotheses formulate:
Hypothesis
One
HO:
Government intervention in financial institution
does not influence risk.
HI:
Government intervention in financial
institution influence risk.
Hypothesis Two
HO: Inadequate collateral
security does not cause risk in the banks.
HI:
Inadequate collateral security causes
risk in the bank.
Hypothesis Three
HO: Risk management does
not have effect in financial organization.
HI: Risk management has effect in financial
organization.
1.6
Significance of the Study
It
is hardly an exaggeration that the difference between the success and the
failure in the banking industry is in the effective management of banks loan
and advance. Efficient loan management is vital to the protection of asset and
achievement of adequate return to the investment. Though much work abound in the
literature of the technique of risk management the methods of reducing risk.
Hence the significance of this study to banks will enable them to appreciate an
appraisal of the risk and control mechanism. The economy as a whole will
benefit from the study.
1.7
Scope of the Study
The
study of risk management in Nigeria listed bank is used in my analysis all
references therefore relate to united bank for Africa Plc. A six year period
2000-2005 will be studied
1.8
Limitation of Study
The
limitation of this study includes some problem or constraint encountered.
1.
Time to get all the information is not
there.
2.
Some of the respondents are not
willing to response to the questionnaires, because some are afraid.
3.
Financial limitation which led to the inability
to provide all the material that is needed in this study.
1.9
Definitions of Terms
Risk:
Is
defined as a possible event or circumstance that can have negative influence on
the enterprise in question. Its impact can be on the very existence of the
resources (human and capital).
Risk
Management: Risk management according to Raghaven
(2003) is the proactive action in the present future.
Financial
risk management: Is the process of creating economic
value in the firm by using financial instrument to manage the exposure of this
risk. Financial risk management can be quantitative and qualitative.
Market
Risk: Is the method of assessing the market using the
standard statistical techniques.
Credit
Risk Rate: It is the risk where by an investor
supply money goods securities return from a promised future payment.
Money:
This can be defined as anything which passes freely from one hand to another.
And it is generally acceptable in settlement.
Collateral:
The
property pledge as a guarantee of payment or obligation on loan.
Operational
Risk: Is the risk continual circle process which result
from loss of inadequate internal procedures or organization internal activities
such as market credit risk.
Basis
risk: It is the risk, where interest rate of different
asset/liabilities and off balance sheet item may change in different magnitude.
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