Impact of Risk Management in Financial Institutions; a Case Study of United Bank of Africa
Chapter One
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.
- To investigate the extent to which government has intervened in financial institution in order reduces risk in banks.
- To highlight the rate at which inadequate collateral security increase the risk management.
- To determine whether risk management has any effect in financial organization.
CHAPTER TWO
REVIEW OF RELATED AND RELEVANT LITERATURE
Introduction
The effectual management of financial institutions and other business institutions and the infrequent tragedies related to life, in tandem with social and political disturbances, are instances of the risks, which any society is open to. It is not always likely to completely do away with these risks, but the possibility of loss can be minimalized by adjusting some of the situations associated with loss (Thomas & Raphael, 2014). Employing this in the financial institutions, it has become of paramount importance than ever for the financial institutions to handle the diverse forms of risk efficiently they encounter, counting the liquidity, credit, information systems, and market risks. These dynamic occurrences at times bring about a novel set of risks whose solution can only be achieved through effective planning and well-prearranged risk management procedures. The secret to the effectual management of risks is not to eliminate the intrinsic risks. For instance, credit operations of a financial institution have the intrinsic risk of potential credit losses, but by risking, financial institutions can transform a reward for the risky undertakings and earn revenues. Risks can, therefore, a source of income to the financial institutions. Nevertheless, risk management in the Nigerian banking industry has not generated many outcomes as expected due to hindrances that include internal loans, ineffective policies and so on. It is common in Nigeria for financial institutions to prolong credit advances to directors, pals and other close relations without adhering to the set policies (Thomas & Raphael, 2014). The outcome of this practice is bad debts brought about by insufficient recovery processes which lead to the incapability of these financial institutions to recover credit and advances given to these sets of stakeholders eventually causing banking sufferings. Another issue is the operational risks. These involve direct and indirect loss ensuing from insufficient or botched internal procedures, systems, employees or external risks. The expression of prevalent operational risks in the Nigerian banking industry is the frequency of forgeries and fraudulent acts (Abdullahi, 2013). Moreover, ignorance and violation of the applicable policies meant to alleviate operational risks by the institutions’ management contribute to the prevalence of this form of risk. Some managers in the Nigerian financial institutions are either ill-informed of the inherent banking risks or have abandoned the policies that shield the financial institutions operations from possible losses (Abdullahi, 2013).
What is Risk Management?
Risk management in business context refers to the opinion that the probability of an occurrence can be lessened or its aftereffects minimalized. Effectual risk management attempts to maximize the gains of a risk while alleviating the risk itself. Risk management encompasses the practice of pinpointing risks, evaluating their consequences, and arriving at the decision on the best course of action and assessment of the risk (Adenkule & Ishola, 2011). Risk management may also be defined as the identification; examination and prioritizing of risks tracked by harmonized and costeffective use of resources to oversee and control the possibility and the outcome of illfated happenings. Risks can be brought about by financial market uncertainties, legal repercussions, lending risks, misfortunes, natural reasons and tragedies, as well as intentional acts from a competitor. Risk management allows financial institutions to pinpoint and apprehend the dangers to which they are exposed (Adenkule & Ishola, 2011).
Risk Management in Nigerian Financial Institutions
The banking industry is an exceedingly controlled industry with exhaustive and determined regulators. Though the banks fight to carry on with the transformations in the regulatory settings, regulators try to manage their assignment and efficiently control their banks. The effects of these dynamics are that the financial institutions are experiencing limited pro-active evaluation by the regulators, inadequate time spent with the institutions and the possibility for more challenges finding their way through these weaknesses, possibly leading to a general increase in bank fiascos (Adenkule & Ishola, 2011). Financing institutions business is to deal with risks related to acceptance of deposits, lending, and trading selections. The varying economic surroundings have a substantial effect on financial institutions and frugality as they fight to adequately deal with their interest rates range with low credit rates, fight for depositors, and the overall market fluctuations, industry tendencies and economic changes (Andre, 2008). Management letdown can be easily identified in losses brought about by excessive lending exercises and unreasonable risk tolerance levels. Nevertheless, as deeper findings will indicate that failure can be pinpointed inefficient operations, impaired internal control surroundings, and absence of attention to detail by managers. For the Nigerian financial institutions, it has been a struggle to efficiently establish their growth plans with the latest economic market (Bank of Tanzania, 2010). An increasing interest rate may be thought to be beneficial to financial institutions. However, the outcome of the transformations on businesses and consumers is unforeseeable, and the struggles remain for financial institutions to expand and efficiently deal with the growth to create earnings to shareholders. Additionally, the Nigerian financial institutions asset management poses a considerable challenge in the present day economic surroundings. Lending is a chief asset for financial institutions and when credit quality deteriorates, the basis of a financial institution is significantly weakened (Advisen Insurance Intelligence, 2015).
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to assess the impact of risk management in financial institutions.
Sources of Data Collection
Data were collected from two main sources namely:
Primary source and Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the Study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information to assess the impact of risk management in financial institutions. A total of two hundred (200) respondents (staffs) from United Bank of Africa (UBA).
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to reiterate that the objective of this study was to examine the impact of risk management in financial institutions.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given.
In this chapter, certain recommendations are made which in the opinion of the researcher are drawn from the findings of the study.
Summary
This study was undertaken to examine the impact of risk management in financial institutions. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.
Conclusion
This study has therefore concluded that adequate risk management practices in Nigerian banks will lead to positive performance financially. This has been concluded from the result in the study.
The study also concluded that risk measurement, Risk management environment and adequate internal controls have the highest impact on financial performance of banks in Nigeria. Thus, as each shilling invested in risk measurement techniques and risk management environment techniques and internal control increases revenues generation and the financial performance of commercial banks increases. Therefore commercial banks need to put more efforts in risk management practices in order to improve financial performance of the banks.
The study established that the study variables i.e. risk management practices and financial performance of the banks had significant positive correlation coefficient. We can therefore conclude that the study variables i.e. risk management and financial performances of commercial banks were highly correlated.
Recommendation
From the findings in the study which were based on factual information from the bank Manager, we recommend the following; Nigerian banks should expound their risk measurements techniques and adopt more technical and reliable measures so as to adequately manage the financial risks resulting from the increased financial innovations in the banking sector The financial innovations have been made a reality by use of advanced information techniques.
Commercial banks should also check their risk management policy, Procedures and practices and streamline them with global standards. This standards are adopted by all financial institutions hence it will be very practical to compare risk mitigation procedures and practices of different financial institutions globally. On budget allocation the banks should ensure risk management sections have a stand-alone budget to ensure resources are availed for the ever changing risk environment. By this they would efficiently manage the financial risk and consequently increase their financial performance.
On the risk management practices, the mentioned above risks are not only the risk management practices influencing financial performance of commercial banks in Nigeria. Capital adequacy and investment guidelines were added to the study due to wake of commercial banks going bankrupt due to the inability to meet the financial requirements. In light to this, other risk management practices should be put in to consideration by commercial banks. Capital adequacy and investment guidelines and strategies had a very low mean scores and low beta factor meaning that they were perceived as having less impact in financial performance of commercial banks in Nigeria.
References
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