Risk Management a Critical Tool in Nigeria Banking Institution
CHAPTER ONE
OBJECTIVES OF THE STUDY
In view of the risks prevalent in the credit risks management in Nigerian banks, the major aim of the study is to assess risk management as a critical tool in the Nigerian banking sector. Other aims of the study include;
- To identify the risks faced by commercial banks in Nigeria
- To find out the effects of those risks on the profitability of commercial banks.
- To find out risk management techniques used to treat risk exposures in banks.
- To examine the effects of credit risk exposure on growth and profitability of Nigeria commercial banks.
- To recommend ways of improving commercial banks profitability through adequate risk management techniques.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
The review of related literature in this chapter will be reviewed under various sections covering meaning and concept of risks, business risk and globalization, types of risks managed by financial institutions (commercial banks), overview of the 1988 Accord concerning risks, management, causes of credit risk to commercial banks, the role of liquidity in commercial banks portfolio management, financial risk implication of securities, lending policies of commercial banks. The regulatory and supervisory framework of CBN concerning risk management in banks, risk control and financing in commercial banks, financial risks facing commercial banks as a corporate body and techniques for monitoring and managing financial risks exposure.
BUSINESS RISKS AND ECONOMIC GLOBALIZATION
In its general form, risk refers to variability around an expected value. The probabilities of occurrence of the different outcomes are known, some of which are less desirable than others and may entails a loss. Expected value is the outcome that would occur on average over time if an individual or firm were repeatedly exposure to identifiable conditions, decision or scenarios. Economists make a distinction between risk, in which a random set of out comes can occur for which one known the probabilities, and uncertainty, in which a random set of outcomes can occur for which one does not know the probabilities. For a business enterprise, risk implies any thing that can cause variability in business value such as unexpected increase in cash outflows or unexpected reduction in cash inflows. In effect, business risk refers to variability in cash flow. The major business risks that give rise to variability in cash flow. They are: price risk, credit risk. In recent times, these risks have greatly increased as a result of economic globalization.
Globalization is the process by which national economics increasingly integrated and dependent on one another. It is rooted in three technological revolutions.
In transportation, communication and information technology. Globalization has drastically reduced economic transaction costs from afar and has tended to swallow up inefficient production systems in developing countries with cheap imports from industrialized nations (Shah, 2002).
Globalization ahs created huge concerns among government officials especially in low-income countries as they lose sovereignty over their national economic policies. Also, the combination of huge financial markets and flexible exchange rates makes it possible for national economies to receive large shocks from abroad, some of which tend to be destabilizing as demonstrated by the shocks in Indonesia and Argentina in the late 1990s. for instance, the 1997 Asian currency crisis precipitated by hyper inflation and a 12% decline in Indonesia GDP the following year (Friendman and Livensolhm 2002). This globalization has capacity to greatly, increase the incidence of business risks, are sometimes classified in economic literature as financial risks (Trieschamann et al, 2001).
MEANING AND CONCEPT OF RISK MANAGEMENT
Commercial banks are in the risk business. In the process of providing financial services, they assume various kinds of financial risks. Over the decade our understanding of the place of commercial banks within the financial sector has improved substantially. Over this time, much has been written on the role of commercial banks in the financial sector both in the academic literature (Santomero, 1997).
Suffice it to say that market participants seek the services of these financial institutions because of the ability to provide market knowledge, transaction efficiency and funding capacity. In performing these roles they generally act as a principal in the transaction.
CHAPTER THREE
RESEARCH METHODOLOGY
This Chapter deals with the methodology used by the researcher in the course of the study. It shows the design of the study as well as the techniques of data collection as contained in this chapter, and also are the data sources: primary and secondary, sample size, models of the study and data analysis techniques.
RESEARCH DESIGN
Planning is essential in research: Planning is an academic or scientific method of designing a research work. This planning in research generally is a research design. According to Okeke (2005:64) defined design as it is used in purely research context “as the total constructional plan or structure of the research framework”. He further observed that research design therefore means the structure and planning of the entire approach to the problem that generated the research.
Both quantitative and historical research design will be adopted for this study. The choice of these methods of research design was informed by the fact that extensive use of raw data was made on risk correlated variables as will be analyzed in chapter four of this project work. Historical research on the other is a “Systematic collation of data related to past occurrences in order to test hypotheses or research questions concerning causes, impact/effect or tends of those events anticipate future trends (Gay: 1989)
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter analyzes the model specifications which aided our hypotheses testing. Three formulated hypotheses will be tested from the four objectives stated earlier.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1CONCLUSION
This research work examines the impact of risk management in Nigerian banks and the effect of deposit, asset quality and credit risk exposures on the growth and profitability of Nigeria commercial banks. This study covers risk management in GTBank Nigeria PLC and Fidelity Bank PLC within the period of 2003 and 2008. An event study methodology was employed to examine the effects of deposit, asset quality and credit risk exposures on the growth and profitability of Nigeria commercial banks. Based on the analysis of regression and correlation of the two banks (GTBank Nigeria PLC and Fidelity Bank Nigeria PLC). The study concluded that deposit, asset quality and credit risk exposures have significant positive impact on the growth and profitability of Nigeria commercial banks.
5.2 RECOMMENDATIONS
Based on our research findings on the impact of risk management in Nigeria banking industries, were hereby make the following suggestions to banks:
- Commercial banks risk management departments should be more prudent in identifying and evaluating risks so as to enhance growth and profitability of financial institutions.
- Banks should be careful in their lending habit by making proper channeling of their funds to the supposed sectors of the economy.
- Adequate measures should be taken by the bank managers to avoid bank fragility or distress.
- Effective control measures should be taken also by the risk management department of the banking sector to avoid bankruptcy.
- Banks are to analyze the credit portfolio of a customer before giving loan a customer.
- The policy makers must determine the organizational structure of the lending functions and establish guide lines on how to review loan applications and outstanding loans.
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