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PERFORMANCE OF SELECTED COMMERCIAL BANKS
Digitally Signed by: Content manager’s
DN : CN = Weabmaster’s name
O= UUniversity of Nigeria, Nsukka
OU = Innovation Centre
Fred Attah
Faculty of Business Administration
Department of Management
EFFECT OF RISK MANAGEMENT ON THE
PERFORMANCE OF SELECTED COMMERCIAL BANKS
IN ENUGU STATE, NIGERIA
ADINDE, JUSTICE CHUKWUEMEKA
PG/MBA/12/62020
: Content manager’s Name
Weabmaster’s name
a, Nsukka
Business Administration
EFFECT OF RISK MANAGEMENT ON THE
PERFORMANCE OF SELECTED COMMERCIAL BANKS
ADINDE, JUSTICE CHUKWUEMEKA
EFFECT OF RISK MANAGEMENT ON THE PERFORMANCE OF
SELECTED COMMERCIAL BANKS IN ENUGU STATE, NIGERIA
ADINDE, JUSTICE CHUKWUEMEKA
PG/MBA/12/62020
DEPARTMENT OF MANAGEMENT
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA, ENUGU
SEPTEMBER, 2014
TITLE PAGE
EFFECT OF RISK MANAGEMENT ON THE PERFORMANCE OF SELECTED
COMMERCIAL BANKS IN ENUGU STATE, NIGERIA
ADINDE, JUSTICE CHUKWUEMEKA
PG/MBA/12/62020
A PROJECT REPORT SUBMITTED TO THE DEPARTMENT OF MANAGEMENT,
FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
MASTERS IN BUSINESS ADMINISTRATION (MBA) IN MANAGEMENT
SEPTEMBER, 2014
DECLARATION
I, ADINDE JUSTICE CHUKWUEMEKA, PG/MBA/12/62020, hereby declare that this
project report is original and has not been submitted elsewhere for the award of any degree.
__________________________ __________________
Signature Date
APPROVAL
ii
This work, “EFFECT OF RISK MANAGEMENT ON THE PERFORMANCE OF
SELECTED COMMERCIAL BANKS IN ENUGU STATE, NIGERIA”, by ADINDE
JUSTICE CHUKWUEMEKA is hereby approved as a satisfactory project for the award of
the degree of Masters in Business Administration (MBA) in Management.
____________________________ ___________________
DR. AGBAEZE, E.K Date
(Supervisor)
__________________________ ___________________
External Examiner Date
___________________________ ____________________
DR. UGBAM, O.C Date
(Head of Department)
iii
DEDICATION
To the Ancient of Days, Almighty God, the fountain of wisdom and knowledge who
strengthens and sustains my intellectual endeavours.
To my mum, for all her prayers.
And to my entire family members, for their patience, understanding, unfailing supports and
encouragement all through the programme.
ACKNOWLEDGEMENTS
iv
Several people have been helpful in the course of writing the project, acknowledgements are
due to individuals and corporate bodies that supported me during the period. My utmost
regards goes to my able supervisor, Dr. Agbaeze, E. K for his punctilious supervision.
Amidst his tight schedule, he found it exclusively worthy to be dedicated to this work. I am
equally grateful to all my lecturers, they include; the Dean Faculty of Business
Administration, Prof. Nnabuko Justitia Odinaka, the Head of Management Department, Dr.
Ogechukwu. C Ugbam, Prof. Johnny Eluka, Prof. U.J.F Ewurum, Dr. Vincent Onodugo, Dr.
B.I Chukwu, Dr. Ann Ogbo, Dr. C. Nnadi, Dr. Fr. Anthony Igwe, Dr. C.A Ezigbo and late
Dr. C. O Chukwu,
My profound gratitude goes to the risk officers and operations staff of the banks, in spite of
their tight official schedules, found time to respond to the questionnaires. Their responds on
issues of risk management assisted in reaching the conclusions and recommendations
presented in this work. I am equally grateful to the Librarian and Library staff of the
University of Nigeria, Enugu Campus Library for providing me some of the materials I used.
I am highly indebted to all the authors of books and journal articles, whose works assisted me
greatly in the course of writing this project.
I am grateful to my mum for her motherly care. Her prayers helped me. I owe so much to my
elder brothers; Dr. Ikechukwu and Mr. Azubuike Adinde, they laid the foundation of what I
am today. My profound gratitude also goes to my other siblings; Mrs. Ifeoma Onwuama,
Nneka Aneke, Oluchi Ovuoba, Tessy and Chukwuma and also to my nieces and nephews. I
must not forget to thank my in-laws; Pastor Arinze Onwuama and Dr. Chukwuemeka Ovuoba
for the numerous aids I received from them during the programme.
I sincerely appreciate the moral support of my friends and classmates towards the successful
completion of this work, they include; Dr. (Mrs) Onyia Angela, Uchenna Ibe, Jude Ibe,
Chukwuemeka Umeh, Tochukwu Okeke, Johnny Chikelu, Cyril Eze, Geoffrey Ekoja, Chidi
Onyia, Nnenna Igboanude and Amaka Obeleze, may God reward you all.
Adinde Justice Chukwuemeka
September, 2014
ABSTRACT
v
This study focused on the effect of risk management on the performance of selected
commercial banks in Enugu State, Nigeria. The Commercial banks were selected on a cross
sectional basis. The work evaluated the link between risk management and bank
performance. The study is relevant because of the growing importance of risk management as
the economic environment changes in the face of intense competition, rapid innovation in
financial markets, application of technology and the globalization of financial markets. The
study utilized survey research design because of the type of information needed. Structured
questionnaire was used to collect data for this work and Chi-square statistical approach was
used in testing the acceptability or otherwise of the hypotheses formulated. The results
showed that effective risk management significantly affects the performance of banks. Based
on the findings, it was recommended that banks in Enugu state, Nigeria, should enhance their
capacity in risk management by devising effective and efficient process to identify, measure,
monitor and control risks while the regulatory authority should periodically review the
operations of banks to ensure they comply with relevant provisions of the Bank and Other
Financial Institutions Act (BOFIA 1999) and prudential guidelines.
TABLE OF CONTENTS vi
Title Page -------------------------------------------------------------------------------------- i
Declaration -------------------------------------------------------------------------------------- ii
Approval -------------------------------------------------------------------------------------- iii
Dedication -------------------------------------------------------------------------------------- iv
Acknowledgement ----------------------------------------------------------------------------- v
Abstract -------------------------------------------------------------------------------------- vi
Table of contents ----------------------------------------------------------------------------- vii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study ----------------------------------------------------------- 1
1.2 Statement of Problem -------------------------------------------------------------------- 4
1.3 Objectives of the Study ----------------------------------------------------------- 5
1.4 Research Questions -------------------------------------------------------------------- 5
1.5 Hypotheses ----------------------------------------------------------------------------- 6
1.6 Significance of the Study ----------------------------------------------------------- 6
1.7 Scope and Limitations of the study -------------------------------------------------- 7
1.8 Definition of terms -------------------------------------------------------------------- 7
References ------------------------------------------------------------------------------------- 10
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework ---------------------------------------------------------- 11
2.2 Theoretical Framework ---------------------------------------------------------- 13
2.2.1 Risk and Uncertainty ------------------------------------------------------------------- 13
2.2.2 Rationale for risk Management ------------------------------------------------- 14
2.2.3 The risk Management Process ------------------------------------------------- 16
2.2.4 Risk Identification ------------------------------------------------------------------- 16
2.2.5 Risk Measurement ------------------------------------------------------------------- 16
2.2.6 Risk Monitoring and Control ---------------------------------------------------------- 17
2.2.7 Risk Reporting ------------------------------------------------------------------ 17 vii
2.3 Empirical Review ------------------------------------------------------------------ 17
2.3.1 Credit risk Management --------------------------------------------------------- 19
2.3.2 The Prudential Guidelines --------------------------------------------------------- 20
2.3.3 Credit Portfolio Classification System --------------------------------------- 21
2.3.4 Provision for Non-Performing Facilities --------------------------------------- 23
2.3.5 General Provisions ------------------------------------------------------------------ 24
2.3.6 Credit Portfolio Disclosure Requirement --------------------------------------- 24
2.3.7 Interest Accrual ------------------------------------------------------------------ 25
2.4 Liquidity Risk Management --------------------------------------------------------- 26
2.4.1 Need for Liquidity Risk Management --------------------------------------- 27
2.5 Interest Rate Risk Management ------------------------------------------------ 27
2.6 Market or Systematic Risk --------------------------------------------------------- 28
2.7 Foreign Exchange Risk --------------------------------------------------------- 29
2.8 Solvency Risk ------------------------------------------------------------------ 30
2.9 Operational Risk ------------------------------------------------------------------ 31
2.10 Model Risk --------------------------------------------------------------------------- 32
2.11 Risk Modelling ------------------------------------------------------------------ 32
2.12 Banking Regulation and Risk Management --------------------------------------- 33
2.13 Risk Management and Bank Performance --------------------------------------- 34
References ------------------------------------------------------------------------------------ 36
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design ----------------------------------------------------------------- 40
3.2 Area of Study -------------------------------------------------------------------------- 40
3.3 Population of the Study -------------------------------------------------------- 40
3.4 Sample Size -------------------------------------------------------------------------- 40
3.5 Method of Data Collection -------------------------------------------------------- 41
3.6 Instrument of Data Collection ----------------------------------------------- 41 viii
3.7 Validity of the Instrument -------------------------------------------------------- 41
3.8 Method of Data Analysis -------------------------------------------------------- 42
References ----------------------------------------------------------------------------------- 43
CHAPTER FOUR: PRESENTATION ANALYSIS AND INTERPRETATION OF
DATA
4.1 Presentation and Analysis of Data ---------------------------------------------- 44
4.2 Test of Hypotheses ---------------------------------------------------------------- 56
4.2.1 Decision Rule ------------------------------------------------------------------------- 56
4.2.2 Operational Assumption ------------------------------------------------------- 56
4.2.3 Test of Hypothesis One ------------------------------------------------------- 57
4.2.4 Test of Hypothesis Two ------------------------------------------------------- 59
4.2.5 Test of Hypothesis Three ------------------------------------------------------- 62
4.2.6 Test of Hypothesis Four ------------------------------------------------------- 64
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Summary of Findings ------------------------------------------------------ 68
5.2 Conclusions ------------------------------------------------------------------------ 68
5.3 Recommendations --------------------------------------------------------------- 68
5.4 Contribution to Knowledge ------------------------------------------------------ 69
5.5 Suggestion for Further Research -------------------------------------------- 69
Bibliography -------------------------------------------------------------------------------- 70
Appendix I -------------------------------------------------------------------------------- 75
ix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Modern banking began in Nigeria in 1982 when the African Banking Corporation (ABC)
based in South Africa opened a branch in Lagos. ABC was taken over by British Bank for
West Africa (BBWA) and subsequently changed its name to Standard Bank in 1894 and then
to First Bank of Nigeria in 1894. According to Nwankwo (1991), other early comers included
the Anglo-African Bank established in 1891, which later became Bank of Nigeria in 1905
and the Colonial Bank in 1916. The Colonial Bank was taken over by Barclays Bank (now
Union Bank Plc) in 1925. As at 1928, the British Bank for West Africa and Barclays Bank
were only banks operating in Nigeria.
Indigenous banks started emerging in the early 1930s, several of them sprang up rapidly but
most collapse with the same rapidity due to such factors as poor management, illiquidity,
inadequate capital, speculative features of their operations and most importantly the absence
of a regulatory framework. By 1954, 21 of the 25 indigenous banks had failed with 16 of
them collapsing in 1954 alone. Of the remaining 4 indigenous banks, Mercantile Bank failed
in 1962 leaving only National Bank, African Continental Bank and Agbomagbe Bank (now
WEMA Bank). The spate of bank failures made the colonial administration to enact the
Banking Ordinance in 1952; this was followed by regulations to strengthen the banking
system. The commencement of operations by the CBN in 1959 stemmed the wave of bank
failures (Adekanye 1986).
According to Obadan (1997), the banking sector was dominated by expatriate banks until
1977 when the Federal Government promulgated the Nigerian Enterprises Promotion Decree
which pegged the equity shares in foreign banks to 40%. Since then, the banking industry has
grown steadily, peaking at 120 in 1992 following government’s liberalisation and
deregulation of the banking sector under the Structural Adjustment Programme (SAP)
introduced in 1986. This development led to financial distress in the sector. The distress in
the era could be traced to inadequate executive capacity, unhealthy competition, weak
corporate governance, insider abuse and poor capitalisation. By 2005, 89 banks were
operating in the country with total assets in excess of N2 trillion and a branch network of
over 3000. Majority of the banks exhibited various degrees of weaknesses ranging from poor
asset quality, illiquidity, insolvency, weak capital base, poor corporate governance and poor
management system.
Valencia and Nocera as cited in Opoku-Adarkwa (2011:1) opine that past decade has seen the
world witnessing one of the most shocking financial meltdowns. The effects of the crisis
were pervasive and hit almost every sector of global businesses; the most affected sector was
the financial services industry, specially the banking sector. The banking sector did not only
witness the dramatic disappearance of the most renowned institutions like Leman-Brothers
and Bear Stearns, it also became a regular target for tougher regulations, public anger and
academic criticism. There are numerous explanations on the causes of the current financial
crisis. One factor that has received significant attention during this crisis is risk management
discourse. It seems that risk management has become an important tool, from which banks
try to achieve legitimacy in the eyes of the public and regulators. This triggering effect has
given stakeholders in the Nigerian banking industry cause not only to consider the returns
made in the sector, but also critically examine frameworks used to manage risks in the sector
and safeguard their interests. This is because the failures faced by the industry in recent times
have been blamed largely on the weaknesses of the regulatory frameworks and the risk
management practices of the financial institutions. The greatest impact of the crisis has been
on the banking industry where some banks that were hitherto performing well suddenly
announced large losses with some of them going burst. Some reasons put forward for the
failures in risk management in this regard include the limited role of risk management in the
granting of loans in most banks. This is largely because the banks are unable to influence
business decisions of its borrowers coupled with the fact that their considerations are
subordinated to profitability interests and lack of capacity to adequately make timely and
accurate forecasts. This has resulted in the flouting of basic risk management rules such as
avoiding strong concentration of assets and minimizing the volatility of returns.
Though the impact of the global financial crisis on the banking sector in Nigeria has been
quite minimal such that it did not threaten the survival of banks in the sector, it serves as a
wake-up call to all financial institutions. This is largely because the sector has little exposure
to complex financial instruments and relies mainly on low-cost domestic deposits and
liquidity unlike banks in the developed countries.
Under a new banking sector reform programme announced on July 2004, Nigerian banks
were expected to recapitalise to N25 billion through consolidations by means of mergers and
acquisitions or fresh capital injection. The consolidation exercise that ended in December
2005 produced 25 banks, recently reduced to 22 banks with the acquisitions of
Intercontinental bank Plc, Oceanic bank Plc and Equatorial Trust bank (ETB) Limited by
Access bank Plc, Ecobank Plc and Sterling bank Plc respectively with better prospects for
increased profitability, greater international competitiveness and leading economic
development in the country.
It is against the background above that effects of risk management on the performance of
selected Commercial banks in Enugu State are being presented in this research work.
Risk management as both an economic and financial concept has gained increasing attention
in recent times. In the past decade, rapid innovation in financial markets, deregulation and the
internationalisation of financial markets have changed the face of banking in Nigeria
significantly.
Chorafas (2001) agrees that the origin of risk is uncertainty of future outcome; the probability
of an adverse outcome. It is the chance that events or actions will not have their previously
planned outcome.
Levine (2003) states that risk to a banker means the perceived uncertainty connected with
some event. Presenting the same viewpoint, Besiss (2010) writes that risks are uncertainties
resulting in adverse variations of profitability or losses. It designated any uncertainty that
might trigger losses.
Greuning and Bratanovic (2003) assert that banks are subjected to wide spectrum of risks in
the course of their operations. In broad terms, the main types of risks that banks are exposed
to include financial risks, operational risks, business risks and event risks. Financial risks in
turn comprise two types of risks, namely; Pure risk and Speculative risk. Pure banking risks
are mainly those related to credit risk, liquidity risk and solvency risk. The main categories of
speculative risks are interest rate, currency and market price or position risks.
Risk management in banking refers to the entire set of risk management processes and
models allowing banks to implement risk-based policies and practices. The process covers all
techniques and management tools required for measuring, monitoring and controlling risks.
Interest risk management has grown phenomenally over the past recent years for the
following reasons:
• Banks have major incentives and rapidly staving off risk
• Regulations developed guidelines for risk measurement and for defining risk-based
capital.
• There are also the additional reasons that several new approaches to risk management
have been developed for all types of risks, providing tools that make risk
measurement and their integration into bank processes feasible.
1.2 STATEMENT OF PROBLEM
Commercial banks play essential roles in the process of economic development. As financial
intermediaries, they facilitate the mobilisation of financial resources from surplus units to
deficit units, thereby ensuring efficient allocation and utilisation of funds. To play this crucial
development role on a sustainable basis, commercial banks must have sound corporate risk
management systems in place to forestall the possibility of insolvency, illiquidity and
eventual failure.
Santomero (1997) states that Commercial banks are in the risk business. In the process of
providing financial services, they assume various kinds of financial risks. Over the last
decade our understanding of the place of commercial banks within the financial sector has
improved substantially.
BGL Banking Report (2010) cited by Kolapo, Ayeni and Oke (2012:32) stress that the
Nigerian banking industry has been strained by the deteriorating quality of its credit 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 bank’s 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 bedevilled Nigerian banks.
Evolving an effective risk management system has been a source of constant challenge to
commercial banks. The fact that commercial banks are in the risk business accentuates the
importance of a strong and sustainable system for identifying, measuring, monitoring and
controlling the spectrum of risks faced by commercial banks. Available evidence indicates
that commercial banks do not give adequate emphasis to risk management in terms of
resources commitment and the level of board and management support deserved by the
process.
More than any other factor, inadequate risk management explains the difficulties faced by
financial institutions in Nigeria. The illusion of paper profits, wrapped corporate governance
and a weak financial reporting environment have over the years deluded the banks that all
that counted was the quantum of the bottom line without regard to the element of risk. It is
therefore no surprise that in the wake of the consolidation programme most Nigerian banks
which hitherto appeared to be doing well suddenly became insolvent and illiquid.
In line with the above observations and the seemingly indispensability of banks in the
economy, this study is designed to examine effects of risk management on the performance
of selected Commercial banks in Enugu State.
1.3 OBJECTIVES OF THE STUDY
This study aims at assessing effects of risk management on the performance of selected
Commercial banks in Enugu State. Specifically, the study intends to achieve the following
objectives:
1. To identify the risks encountered by Commercial banks in Enugu State.
2. To determine the risk management practices among Commercial banks.
3. To determine the extent the legal and regulatory provisions designed to manage risks
in the Nigerian banking system support sound risk management.
4. To determine the effect of resourceful risk management and bank performance in
Enugu State.
1.4 RESEARCH QUESTIONS
The research questions are designed to obtain answers to the major issues of concern to the
researcher in the problem area. The following research questions are considered relevant to
the study.
1. What are the risks encountered by the Commercial banks in Enugu State?
2. What are the risk management practices among Commercial banks in Enugu State?
3. To what extent does the existing legal and regulatory provisions support sound risk
management practices among Nigerian banks?
4. What effects do risks management have on performance of Commercial banks in
Enugu State?
1.5 HYPOTHESES
The following hypothesis formed the basis of this research work:
Hi: There are significant risks encountered by Commercial banks in Enugu State.
Hi: There are effective risk management practices among Commercial banks in
Enugu State.
Hi: The existing legal and regulatory provisions support sound risk management
practice among Nigerian banks.
Hi: Effective risk management has significant effects on the performance of banks
in Enugu State.
1.6 SIGNIFICANCE OF THE STUDY
There is paucity of research in risk management generally and as it relates to the banking
sector in particular. A healthy banking system is a prerequisite for a sound and stable
financial system. The various stakeholders in the commercial banks range from employees,
management, investors, shareholders, government, depositors, regulators and financial
analysts. These interested parties suffer in varying degrees when a commercial bank suffers
financial difficulties or failure due to vulnerability to risk. The potential loss of deposits is the
immediate consequence of a commercial bank crisis. Besides, there is the possibility of the
loss of investments by shareholders, the loss of employment by employees and the potential
for contagion in the event of a failure or severe financial crisis.
The findings of the study will arouse the risk awareness and consciousness of the banks to
enable deeper understanding of the various issues involved in the risk management process.
It is hoped that the study will contribute to the existing pool of knowledge on risk
management in banks and offer useful tools and techniques for better identification,
measurement, monitoring, controlling and reporting of risks faced by commercial banks.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
This study was delimited to the effects of risk management on performance of selected
commercial banks in Enugu State. It focused on the reasons, objectives, procedures and
benefits of risks management.
However, one cannot reasonably undertake any research project without some constraints. In
choosing the research topic and scope of the study the researcher was mindful of factors that
could impede the effective realisation of the research objectives. Refusal of some banks in
accepting and answering questions contained in the questionnaire is one the major constraints
encountered during this study. It is well known that lack of time and financial resources can
limit the potential scope and depth of a research work. This has been the case with this study.
This study has therefore not been as exhaustive as it should be due to the paucity of time and
finance.
Risk management is a growing area of interest in economics and finance with multiple
disciplines and subfields. This research work has not been able to explore the vast and
crucially important issues in risk management because its scope is limited to the experience
of commercial banks in Enugu State.
1.8 DEFINITION OF TERMS
• Earnings Risk
The earnings of a bank may sometimes decline due to factors inside the bank or due to
exogenous factors such as changes in laws and regulations or changes in economic
conditions. Earnings risk is therefore the risk to a bank’s bottom line arising from
internal and external factors.
• Inflation Risk
This is the probability that an increasing price level for goods and services will
unexpectedly erode the purchasing power of banks earnings and the return to its
shareholders.
• Credit Risk
Credit or counterparty risk is the chance that a debtor or financial instrument issuer
will not be able to pay interest or repay the principal according to the terms specified
in a credit agreement.
• Liquidity Risk
According to Greuning and Bratanovic (2003), a bank faces liquidity risk when it
does not have the ability to efficiently accommodate the redemption of deposits and
other liabilities and to cover funding increases in the loan and investment portfolio.
These authors go further to propose that a bank has adequate liquidity potential when
it can obtain needed funds (by increasing liabilities, securitising, or selling assets)
promptly and at a reasonable cost. The Basel Committee on Bank Supervision, in its
June 2008 consultative paper, defined liquidity as the ability of a bank to fund
increases in assets and meet obligations as they become due, without incurring
unacceptable losses.
• Market Risk
According to Bessis (2010), “market risk is the risk of adverse deviations of the
market-to-market value of the trading portfolio due to market movements during the
period required to liquidate the transactions”.
• Interest Rate Risk
This is the risk incurred by a bank when the maturity of its assets and liabilities are
mismatched. It is the impact of changing interest rates on a bank’s margin of profits.
It is the risk of decline in a bank’s earnings due to the movements in interest rates.
• Currency or Exchange Rate Risk
This is the risk that exchange rate changes can affect the value of bank’s assets and
liabilities.
• Operation Risk
This is the risk that existing technology may malfunction or break down. It relates to
the uncertainty regarding the firm’s investments and investment opportunities and are
influenced by the product markets in which a firm operates.
• Insolvency Risk
This is the risk that a bank may not have enough capital to settle or offset a sudden
decline in the value of its assets relative to its liabilities.
• Basel Accord
Used to refer to the Committee of the Bank of International Settlements which sets
guidelines on capital requirements for banks.
REFERENCES
Adekanye, F. (1986), The Elements of Banking, UK, Graham Burns.
Bessis, J. (2010), Risk Management in Banking, England, John Wiley and Sons.
Chorafas, D.N. (2001), Managing Risk in the New Economy, New Jersey: Prentice Hall.
Greuning, H.V and Bratanovic, S.B (2003), Analysis and Managing Banking Risk: A
Framework for Assessing Corporate Governance and Financial Risk, United States
of America: World Bank Publications.
Kolapo, T.F, Ayeni, R.K and Oke, M.O (2012), “Credit Risk and Commercial Banks
Performance in Nigeria: A Panel Model Approach”, Australian Journal of Business
and Management Research, Vol. 2 No 2, PP 31-38. Retrieved on February 1st,
2014, from http://www.ajbmr.com/articlepdf/aus-20-70i2n2a4.pdf
Levine, R. (2003), The Corporate Governance of Banks: A Concise Discussion of Concepts
and Evidence, Working Paper, Global Corporate Governance Forum, Washington
DC
Nwankwo, G.O (1991), Money and Capital Markets in Nigeria Today, Lagos, University of
Lagos press.
Obadan, M. I (1997), “Distress in Nigeria’s Financial Sector-need for house cleaning by
Financial Institutions”. A speech delivered at the closing lunch of the 3rd
Annual
Bankers Conference, Unpublished.
Santomero, A. M (1997), “Commercial Bank Risk Management:An Analysis of the Process”:
Paper Presented at the Wharton Financial Institution Centre Conference on Risk
Management in Banking, Journal of Financial Services Research. Retrieved on
February 1st, 2014 from http://www.fic.wharton.upenn.edu/../9511B.pdf
CHAPTER TWO
REVIEW OF RELATED LITERATURE
The relevance of banks in the economy of any nation cannot be overemphasized. They are the
cornerstones, the linchpin of the economy of a country. The economies of all market-oriented
nations depend on the efficient operation of complex and delicately balance system of money
and credit. Banks are an indispensable element in these systems. They provide the bulk of
money supply as well as the primary means of facilitating the flow of credit. Consequently, it
is submitted that the economic well being of a nation is a function of advancement and
development of her banking industry.
2.1 CONCEPTUAL FRAMEWORK
Banking is a risk business. In Nigeria, the spate of bank failure in the early days of banking
was accounted for by poor risk management practices, among other factors. According to
Onyiriuka (2004), the widespread banking crisis of the 1990 during which several banks
failed was phenomenal in terms of its scope and consequence on the economy. About thirty-
four banks were liquidated by the regulatory agencies within a period of four years 1994-
1998. Many of the banks failed mainly due to poor risk management practices arising from
weak corporate governance, poor asset quality, illiquidity and lean capital base.
In pursuit of its profit objective, a bank must ensure that it is doing so in the context of
enlightened consciousness of the risks and uncertainties in its operating environment. In
Rawnsley’s (1995) view, balancing risk and return is therefore critical to maintaining profits
and reputation as well as operational independence. Most banking risks are embedded in
processes and products. When the process or the product goes wrong it can result in a
scandalous loss of international proportion such as Bank of Credit and Commerce
International (BCCI) or the 94 year old Barings Bank in the United Kingdom.
The need for risk management in the banking industry has become more urgent owing to the
increasing internationalization of financial markets, rapid innovations, deregulation,
extensive application and swift advancements in technology as well as the phenomenal
growth in non-performing assets. Levine (2003) points out that while the 1950s focused on
the techniques for the management of banks assets, the 1960s and 1970s emphasized liability
management, banking in the 1980s was concerned with risk-how to measure risk and how to
control risk, the improvement of the industry and the satisfaction of customers. This view is
supported by Chorafas (2001), argues that credit risk, market risk, operational risk and other
risks facing an institution are amplified because of globalisation, deregulation, innovation and
technology which together help to define the new economy characterizing the beginning of
the 21st century. The new economy is the name given to those industries benefiting directly or
indirectly from the latest revolution in information and communications technologies, the
extensive use of the latest electronic systems, advanced software, digitalization and the
internet. Banks are participants as well as beneficiaries in this new economy.
Onyiriuka (2004) canvasses that the position of the subject matter of ‘risk’ and ‘uncertainty’
assume considerable importance in determining business success and failures, especially in
banking. He maintained that the conventional approach to appreciating this fact is linked to
the inverse relationship between the two plausible business outcomes, namely a higher risk
leads to more profit and vice versa.
Risk is a function of uncertainty and inability to foresee the future correctly. The connection
between bank success and failure is clearly not simply a question of capital as the existence
of capital alone is not a performance indicator. Failure of banks in several jurisdictions
including Nigeria, the United Kingdom, Spain, Japan, Italy and elsewhere have been
attributed to several risk factors such as the decision-making qualities of its senior personnel
as well as the political environment in which it operates. In the case of Nigeria, the factors
that have been outstanding include poor asset quality (large volume of non-performing
assets), illiquidity of asset portfolio, inadequate capital, absence of effective supervisory and
regulatory framework and wrapped corporate governance.
In a wider context, the experiences of Asia economies also bear relevance to the subject
matter. During the 1980s and 1990s, the East Asian economies experienced extremely high
growth. Key reason were huge loans from Western banks, a rapidly rising population, high
rates of savings and investment, a monetary policy that was able to hold down inflation and
the mirage of exceptional returns on investment, which also characterised other emerging
markets. Former World bank chief economist, Stiglitz (2000) says that it was reckless lending
by international banks and other financial institutions, combined with reckless borrowing by
domestic financial institutions that may have precipitated that crisis.
What has become apparent is that the banking crisis of the recent years has been primarily
due to the sophistication of the financial markets. The innovations of complex financial
products such as derivatives and swaps have further complicated the risk profile of banks and
the risk management process. On the international scene, the incidents involving institutions
such as Barings Bank of England, Daiwa Bank of Japan and Orange County were all linked
to poor understanding of the intricacies of derivatives trading, an innovative financial
product. The intensification of the use of computer and communications technology enabled
the introduction of various technology-driven products such as electronic funds transfer,
online and real-time banking, electronic smartcards and other technology applications and
platforms with embedded risks.
Despite the advances in the financial market, risk has been an ever-present phenomenon. Its
understanding and treatment has been founded on some theoretical underpinnings, which
have enabled risk researchers and practitioners to undertake meaningful work on the subject.
2.2 THEORETICAL FRAMEWORK
The changing environment in which banks operate presents major opportunities for banks,
but also entails complex, variable risks that challenge traditional approaches to bank
management. As a result, banks must gain financial risk management capabilities in order to
survive in the market-oriented environment, withstand competition and contribute
meaningfully to economic growth and development. To establish our theoretical framework,
we shall examine two terms that writers sometimes confuse. These are ‘risk’ and
‘uncertainty’.
2.2.1 RISK AND UNCERTAINTY
In understanding the theoretical underpinnings of risk management, it is pertinent to explore
the distinction between the two related yet different concepts of risk and uncertainty. It is
common to find authors who equate risk to uncertainty and use the two terms
interchangeably. It is also common place to find other writers who contrast between risk and
uncertainty in order to bring out clearly the meanings of the two terms. According to Irukwu
(1974:4), in everyday life the one thing that is certain is uncertainty and one of the purposes
of insurance is to alter the scenario by substituting certainty for uncertainty. For a better
understanding of the relationship between the two terms, we shall consider the views of some
authors. Willet as cited in Ale (2009) defined risk as “the objectified uncertainty regarding
the occurrence of an undesired event”. Risk is inherent in any walk of life and can be
associated with every human decision-making action of which the consequences are
uncertain. Okafor (1983:28), states that the term ‘risk’ has different shades of meaning.
Literarily, it means exposure to danger or economic adversity. In the latter sense, risk is used
as a surrogate for the likelihood of loss or the potential size of such a loss. Pfeffer (1956)
contends that risk is a combination of hazards and is measured by probability; uncertainty on
the other hand is measure by the degree of belief. Risk is a state of the world; uncertainty is a
state of the mind.
Some writers clearly distinguished between risk and uncertainty by associating risk with
some degree of qualification and measurability. Akinsirule (2002), opines that risk occurs
where what the future outcome will be is not known but where the various possible outcomes
may be expected with some degree of confidence from knowledge of past or existing events.
In other words, in a risk situation, probabilities of alternative outcomes can be estimated,
where in the case of confidence from knowledge of past or existing events, such that no
probability estimates are available.
To draw the distinction between the two concepts, Bessis (2002), observe that not all factors
that alter the environment and the financial market such as interest rate, exchange rate, stock
indexes, and inflation rate are measurable. According to him, there are unexpected and
exceptional events that radically and abruptly alter the general environment. Such
unpredictable events described as uncertainties might generate fatal risks that drive
businesses to bankruptcy. In his view, one direct way to deal with these types of risks is stress
scenarios or ‘worst-case’ scenarios, where all relevant parameters take extreme values.
2.2.2 RATIONALE FOR RISK MANAGEMENT
It seems appropriate for any discussion of risk management procedures to begin with why
banks manage risks. According to standard economic theory, managers of value maximizing
firms ought to maximize expected profit without regard to the variability around its expected
value. However, there is now a growing literature on the reasons for active risk management.
In fact, the recent review of risk management reported in Oldfield and Santomero (1995) lists
dozens of contributions to the area and at least four distinct rationales offered for active risk
management. These include managerial self-interest, the non-linearity of the tax structure, the
costs of financial distress and the existence of capital market imperfections. Bessis (2002),
expresses the view that visibility and sensitivity to risks are so important to banks because
banks are ‘risk machines’ which transform risks and enabled them in banking products and
services.
Bessis (2002), opines that there are strong motives for a bank to implement risk management
practices. These include providing a balanced view of risk and returning from a management
point of view, to develop competitive advantages and to comply with increasingly stringent
regulations. Banks face a range of regulatory risks when they default on statutory and
regulatory requirements such as monetary penalties, sanctioning of the board of directors and
in extreme cases licence revocation and liquidation.
Effective risk management by banks facilitates the achievement of the goal of maximization
of shareholder wealth. It enables banks to achieve sustained market price stability, to protect
and grow return on investment. From a macroeconomic perspective, the argument for risk
management by banks appears to be even stronger. Grenuning and Bratanovic (2003),
suggest that because banks participate in both the domestic and international financial
systems and play a key role in national economic development, they must manage risks
effectively.
In the financial universe, risk and return are two sides of the same coin often; it is easy to
lend and to obtain attractive revenues from risky borrowers. The price to pay is usually one
that is higher than the prudent bank’s risk. The prudent bank limits risk and therefore both
future losses and expected revenues by restricting business volume and screening out risky
borrowers. Although the prudent bank avoids losses, it might suffer from lower market share
and lower revenues. However, after a while, the risk-taker might find out that higher losses
materialized and obtain an ex-post performance lower than that of the prudent bank. In order
to compare banks under the two different scenarios above, it is necessary to assign some
measure of risk to income. It does work to compare policies driven by different risk appetites.
According to Berger and Allen (1994), comparing performances without risk-adjustment is
like comparing Apples and Oranges.
From a competitive perspective, screening bank borrowers and differentiating the process
accordingly, given the borrowers’ standing and their contributions to the bank’s portfolio
risk-return profile are key issues. Hughes, William, Lorretta and Choon-Geol (1994), take the
position that not doing so results in adverse economics for banks. To drive the point home,
Dahl, Ronald and Shrieves (1990), argue that banks that do not differentiate risks lend to
borrowers rejected by banks that better screen and differentiate risks because of their strong
risk management systems. By overpricing good risks, banks without good risk systems
discourage good borrowers and by under pricing risks to customers, they attract them. By
attracting the relatively good borrowers and discouraging the relatively bad ones, banks with
less advanced risk management processes face the risk of becoming riskier and poorer than
banks adopting good risk-based practices at an earlier stage.
It is logical therefore to expect that those banking institutions that actively manage their risks
have a competitive advantage. They take risks more consciously and from an enlightened
perspective, they anticipated adverse changes, they protect themselves from unexpected
events and they gain expertise to price risks. Competitors who lack such abilities and systems
may gain business in the short-term. Nevertheless, they will lose ground with time, when
those risks materialize into losses, because of the higher degree of vulnerability.
2.2.3 THE RISK MANAGEMENT PROCESS
Since risk is the probability that outcomes will vary from our expectations, the risk
management process aims to minimize divergence of outcomes from expectations and
achieve outcomes that are more predictable. The risk management process, therefore involves
the following:
2.2.4 RISK IDENTIFICATION
This has to do with knowing those factors that may lead to variations from expected
outcomes. This phase of the risk management process involves discovering and
understanding the risks, including their structure and incidence on a given business process
such as lending or funds transfer. In making a lending decision, for example the credit analyst
must clearly identify many of the credit risks as he can conceivably identify and give a clear
indication of their nature and characteristics. Onyiriuka (2004) asserts that such risks include
the probability of liquidity stress, cash deficiency, income or business volatility, collateral
inadequacy and outright default.
2.2.5 RISK MEASUREMENT
Risk measurement and quantification has been one of the most challenging aspects of the risk
management process. It estimates the likelihood of occurrence of risk factors and their
severity. Kwan (1990) states that while quantitative finance addresses extensively the risks in
capital markets, the extension to the various risks of financial institutions remained a
challenge for several reasons. The first is that risks are less tangible and visible than income.
Risks remain intangible and invisible until they materialize into losses. Second is that it is
generally the case that simple solutions do not capture risks. For instance a credit risk
exposure from a loan is not the risk. The real risk depends on the likelihood of losses and the
magnitude of recoveries in addition to the size of the amount at risk. But Dimson (1979),
notes that observing and recording losses and their frequencies could be a solution.
Unfortunately, more often than not, loss histories are insufficient. For example, it is not
simple to link observable losses and earning declines with specific sources of risks.
2.2.6 RISK MONITORING AND CONTROL
This involves designing measures aimed at mitigating the impact of risk or counteracting
them. Monitoring ensures that measures put in place to contain risk are continuously
implemented and serves their purpose.
To ensure that banks operate in a sound risk management environment with reduced impact
of uncertainty and potential losses, managers need reliable risk measures to direct capital to
activities with the best risk/reward ratios. Management needs estimates of the size of
potential losses to stay within limits set through careful internal considerations and by
regulators. They also need mechanisms to monitor positions and create incentives for prudent
risk taking by divisions and individuals. According to Pyle (1997), risk management is the
process by which managers satisfy these needs by identifying key risks, obtaining consistent
understandable operational risk measures, choosing which risks to reduce, which to increase
and by what means and establishing procedures to monitor resulting risk positions.
2.2.7 RISK REPORTING
Risk reporting entails keeping accurate and comprehensive data on expectations vis-à-vis
performance as a basis for policy review and corrective action. While the above phase of the
risk management process are generic and can be adopted for any type of risk, the
differentiation of risk also demands a unique set of strategies for managing them. Banking
risk could be better managed if the peculiar risks are clearly delineated and understood
through measurement and quantification.
2.3 EMPIRICAL REVIEW
Risk management evolved from a strictly banking activity, related to the quality of loans, to a
very complex set of procedures and instruments in the modern financial environment. It
underscores the fact that the survival of an organization depends heavily on its capabilities to
anticipate and prepare for the change rather than just waiting for the change and react to it.
Risk is associated with uncertainty and reflected by way of charge on the fundamental /basic
i.e in the case of business it is the capital, which is the cushion that protects the liability
holders of an institution. These risks are interdependent and events affecting one area can
have ramifications and penetrations for a range of other categories of risk.
There is therefore, the need to understand the risks run by banks and to ensure that the risks
are properly confronted, effectively controlled and rightly managed. Each transaction that a
bank undertakes, however, changes the risk profile of the bank thereby making it a near
impossibility to provide real time risk update and profile of the institution (Opoku-Adarkwa,
2011:11).
Risk Management (RM) is described as the performance of activities designed to minimise
the negative impact (cost) of uncertainty (risk) regarding possible losses (Schmidt and Roth,
1990). Redja (1998) also defines risk management as a systematic process for the
identification, evaluation of pure loss exposure faced by an organisation or an individual, and
for the selection and implementation of the most appropriate techniques for treating such
exposures. The process involves: identification, measurement and management of the risks.
Bessis (2010) also adds that in addition to it being a process, risk management also involves a
set of tools and models for measuring and controlling risk. The objectives of risk
management include the minimization of foreign exchange losses, reduction of the volatility
of cash flows, protection of earnings fluctuations, increment in profitability and assurance of
survival of the firm.
Bassis (2010) defined banking risk as adverse impacts on profitability of several distinct
sources of uncertainty. Risk measurement requires capturing the source of the uncertainty and
the magnitude of its potential adverse effect on profitability. Oldfield and Santomero (1997),
argues that risks facing all financial institutions can be segmented into three separable types
from a management perspective. These are:
(i) risks that can be eliminated or avoided by simple business practices,
(ii) risks that can be transferred to other participants and
(iii) risks that must be actively managed at the firm level.
In the first of these cases, the practice of risk avoidance involves actions to reduce the
chances of idiosyncratic losses from standard banking activity by eliminating risks that are
superfluous to the institution’s business purpose. Common risk avoidance practices here
include at least three types of action:
• The standardisation of process, contracts and procedures to prevent inefficient or
incorrect financial decision is the first of these.
• The construction of portfolios that benefit from diversification across borrowers
and that reduce the effects of any one loss experience is another.
• Finally, the implementation of incentive-compatible contracts with the
institution’s management to require that employees be held accountable is the
third. These points have been made in different context by both Santomero and
Trester (1997) and Berger and Udell (1995).
Bessis (2010) indicates that the goal of risk management is to measure risks in order to
monitor and control them and also enable it to serve other important functions in a bank in
addition to its direct financial function.
2.3.1 CREDIT RISK MANAGEMENT
Of all the risks a bank faces, credit risk is considered the first in terms of importance. The
basic reason for this priority is that most of a bank’s activities relates to lending. Donald et al
in Danson and Adano (2012) defined Credit risk simply as the potential that a bank borrower
or counterpart will fail to meet its obligations in accordance with agreed terms. The goal of
credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining
credit risk exposure within acceptable parameters. Banks need to manage the credit risk
inherent in the entire portfolio as well as the risk in individual credits or transaction. The
effective management of credit risk is a critical component of a comprehensive approach to
risk management and essential to the long-term success of any banking organisation. The
Basel Committee on Banking Supervision (2001) defined credit risk as the possibility of
losing the outstanding loan partially or totally, due to credit events (default risk). Credit risk
is an internal determinant of bank performance. The higher the exposure of a bank to credit
risk, the higher the tendency of the banks to experience financial crisis and vice-versa. Bessis
(2002), states that credit or counterparty risk is the chance that a debtor or financial
instrument issuer will not be able to pay interest or repay the principal according to the terms
specified in a credit agreement. It is an inherent part of banking. Credit risk means that
payment may be delayed or ultimately not paid at all, which can in turn cause cash flow
problems and affect a bank’s liquidity. Counterparty risk comes from non-performance may
arise from a counterparty’s refusal to perform due to an adverse price movement caused by
systematic factors or from some other political or legal constraint that was not anticipated by
the principals. The three main types of credit or counterparty risk are as follows:
(i) Personal or Consumer risk
(ii) Corporate or Company risk
(iii) Sovereign or Country risk
Credit risk is the first of all risks in terms of importance. Default risk, a major source of loss
is the risk that customers default, meaning that they fail to comply with their obligations to
service debt. Credit risk is also the risk of a decline in the credit standing of an obligor or the
issuer of a bond or stock. Such deterioration does not imply default but it does imply that the
probability of default increases. In their work on capital regulation and banks risk, Furlong,
Furlong, Frederick and Michael (1989) posit that a deterioration of the credit standing of a
borrower does not materialise into a loss because it triggers an upward move of the required
market yield to compensate the higher risk and triggers a value decline.
In broad terms, they argued that effective credit risk management is anchored on the
following framework, namely, credit portfolio management, lending function and operation,
credit portfolio quality review, non-performing loan portfolio, credit risk management
policies, policies to limit or reduce credit risk, assets classification and loan loss provisioning
policy.
In Nigeria, banks are subject to prudential guidelines, which contains provisions on the
classification and treatment of non-performing credit portfolio.
2.3.2 THE PRUDENTIAL GUIDELINES
Article II. Conscious of the anticipated increase in the number of banks and other financial
institutions, as a result of the SAP induced explosion of the 1990s, the regulatory authority
(the Central Bank of Nigeria) introduced the prudential guidelines with the objective to
ensure qualitative credit to serve as a catalyst for the much anticipated economic boom of the
SAP years. It was meant to serve as the linchpin for credit risk management among banking
institutions. The document states inter alia that “without prejudice to the requirements of the
statement of Accounting Standard on Accounting by Banks and Non-Bank Financial
Institutions (Part 1) issued by the Nigerian Accounting Standards Board (NASB), all licenced
banks shall be required to adhere to the prudential guidelines enunciated in this circular for
reviewing and reporting their performance, with immediate effect. In view of the
international nature of banking, the guidelines are based on practices endorsed by reputable
international financial institutions and regulatory authorities.
These guidelines should be regarded as minimum requirements and licenced banks, which
already have more stringent policies and practices in place, are encouraged to continue with
them”.
2.3.3 CREDIT PORTFOLIO CLASSIFICATION SYSTEM
According to the Prudential Guidelines for Licenced Banks (1990), issued by the Banking
Supervision Department of the Central Bank of Nigeria, licenced banks should review their
credit portfolio continuously (at least once in a quarter) with a view to recognising any
deterioration in credit quality. Such reviews should systematically and realistically classify
banks’ credit exposures based on the perceived risks of default. It states that in order to
facilitate comparability of banks’ classification of their credit portfolios, the assessment of
risk of default should be based on criteria, which should include, but are not limited to,
repayment performance, borrower’s repayment capacity on the basis of current financial
condition and net realizable value of collateral.
Credit facilities (which include loans, advances, overdrafts, commercial papers, bankers
acceptances, bills discounted, leases, guarantee and other loss contingencies connected with a
bank’s credit risks) should be classified as either “performing” or “non-performing” as
defined below:
(a) a credit facility is deemed to be performing if payments of both principal and interest
are up-to-date in accordance with the agreed terms;
(b) a credit facility should be deemed as non-performing when any of the following
conditions exists:
(i) interest or principal is due and unpaid for 90 days or more.
(ii) interest payments equal to 90 days interest or more have been capitalised,
rescheduled or rolled over into a new loan (except where facilities have
been reclassified as specified).
The guideline states that the practice whereby some licenced banks merely renew, reschedule
or rollover non-performing credit facilities without taking into consideration the repayment
capacity of the borrower are objectionable and unacceptable. Consequently, before a credit
facility already classified as “non-performing” can be reclassified as “performing” the
borrower must effect cash payment such that outstanding unpaid interest does not exceed 90
days. Non-Performing credit facilities should be classified into three categories namely, sub-
standard, doubtful or lost on the basis of criteria specification below:
(a) Sub-standard
The following objective and subjective criteria should be used to identify sub-standard credit
facilities:
(i) Objective Criteria: facilities on which unpaid principal and/or interest
remain outstanding for more than 90 days but less than 180 days.
(ii) Subjective Criteria: credit facilities which display well defined weaknesses
which could affect the ability of borrowers to repay such as inadequate cash
flow to serve debt under capitalization or insufficient working capital, absence
of adequate financial information or collateral documentation, irregular
payment of principal and/or interest and inactive accounts where withdrawals
exceed repayments or where repayments can hardly cover interest charges.
(b) Doubtful
The following objective and subjective criteria should be used to identify doubtful credit
facilities.
(i) Objective Criteria: facilities on which unpaid principal and/or interest remain
outstanding for at least 180 days but less than 360 days and are not secured by
legal title to leased assets or perfected realisable collateral in the process of
collection or realisation.
(ii) Subjective Criteria: facilities which, in addition to the weaknesses associated
with sub-standard credit facilities reflect that full repayment of the debt is not
certain or that realisable collateral values will be insufficient to cover bank’s
exposure.
(c) Lost Credit Facilities
The following objective and subjective criteria should be used to identify lost credit
facilities.
(i) Objective Criteria: facilities on which unpaid principal and/or interest remain
outstanding for 360 days or more and are not secured by legal title to leased
assets or perfected realisable collateral in the course of collection or
realisation.
(ii) Subjective Criteria: facilities which in addition to the weaknesses associated
with doubtful credit facilities, are considered uncorrectable and are of such
little value that continuation as a bankable asset is unrealistic such as facilities
that have been abandoned, facilities secured with unmarketable and
unrealisable securities and facilities extended to judgement debtors with no
means or fore collapsible collateral to settle debts.
The guideline therefore states that banks are required to adopt the criteria specified above to
classify their credit portfolios in order to reflect the true accounting values of their credit
facilities. Licenced banks should note that the Central Bank of Nigeria reserves the right to
change the objective criteria for the classification of any credit facilities and to prescribe the
classification it considers appropriate for such credit facility.
2.3.4 PROVISION FOR NON-PERFORMING FACILITIES
The guideline further states that licenced banks are required to make adequate provisions for
perceived losses based on the credit portfolio classification system prescribed above in order
to reflect their true financial condition. Two types of provisions (that is specified and
general) are considered adequate to achieve this objective. Specific provisions are made on
the basis of perceived risk of default on specific credit facilities while general provisions are
made in recognition of the fact that even performing credit facility harbours some risk of
loss no matter how small. Consequently, all licenced banks shall be required to make
specific provisions for non-performing credits as specified below:
(a) For facilities classified as sub-standard, Doubtful or Lost:
(i) Interest overdue by more than 90 days should be suspended and recognised
on cash basis only.
(ii) Principal repayments that are overdue by more than 90 days should be fully
provided for and recognised on cash basis only.
(b) For principal repayments not yet due on non-performing credit facilities, provisions
should be made as follows:
(i) Sub-standard credit facilities: 10% of the outstanding balance.
(ii) Doubtful credit facilities: 50% of the outstanding balance;
(iii) Lost credit facilities: 100% of the outstanding balance
For prudential purpose, provisioning as prescribed above should only take cognisance of
realisable tangible security (with perfect legal title) in the course of collection or realisation.
Consequently, collateral values should be recognised on the following basis:
(a) For credit exposure where the principal repayment is in arrears by more than six
months, the outstanding unprovided principal should not exceed 50% of the estimated
net realisable value of the collateral security.
(b) For credit exposure where the principal repayment is in arrears by more than one
year, there should be no outstanding unprovided portion of the credit facility
irrespective of the estimated net realisable value of the security held.
(c) For credit exposure secured by a floating charge or by an unperfected or equitable
charge over tangible security, it should be treated as an unsecured credit and no
account should be taken of such security held in determining the provision for loss to
be made.
2.3.5 GENERAL PROVISIONS
Each licenced bank is required to make a general provision of at least 1% of risk assets not
specifically provided for.
2.3.6 CREDIT PORTFOLIO DISCLOSURE REQUIREMENT
(a) Each licenced bank is required to provide in its audited financial statements analysis
of its credit portfolio into “performing” and “non-performing” as stated.
(b) The amount of provision for deterioration in credit quality (that is losses) should be
segregated between principal and interest.
(c) A maturity profit of credit facilities based on contracted repayment programme
should be provided along with the maturity profile of deposit liabilities in the
financial statement.
2.3.7 INTEREST ACCURAL
It is the responsibility of bank management to recognise revenue when they are earned or
realised and make provision for all losses as soon as they can be reasonably estimated.
However, experience revealed a wide diversity amongst licenced banks on income
recognition. While a few banks cease accruing interest on non-performing credit facilities
after three months, some after six months or a year, some do not appreciate the need to
suspend interest on such facilities.
In order to ensure the reliability of published operating results, the following criteria should
be adopted by all licenced banks for the treatment of interest on non-performing credit
facilities:
(a) All categories of non-performing credit facilities should automatically be placed on
non-accrual status that is, interest due thereon should not be recognised as income.
(b) All interest previously accrued and uncollected but taken into revenue should be
reversed and credited into suspense account specifically created for this purpose
which should be called “interest in suspense account” unless paid in cash by the
borrower. Future interest charges should also be credited into same account until such
facilities begin to perform.
(c) Once the facilities begin to perform, interest previously suspended and provisions
previously made against principal debts should be recognised on cash basis only.
Before a “non-performing facilities” can be reclassified as “performing”, unpaid
interest outstanding should not exceed 90 days.
In Baestaen’s (1999:225) view, in managing the credit portfolio, the considerations that form
the basis for sound lending policies include; limit on total outstanding loans, geographic
limits, credit concentration, distribution by category, types of loans, maturities, loan pricing,
lending authority, appraisal process and maximum ration of loan amount to the market value
of pledged securities, others are financial statement disclosures, policy or loan impairment,
collections and financial information.
2.4 LIQUIDITY RISK MANAGEMENT
According to Greuning and Bratanovic (2003), a bank faces liquidity risk when it does not
have the ability to efficiently accommodate the redemption of deposits and other liabilities
and to cover funding increases in the loan and investment portfolio. These authors go further
to propose that a bank has adequate liquidity potential when it can obtain needed funds (by
increasing liabilities, securitizing, or selling assets) promptly and at a reasonable cost.
Liquidity risk can best be described as the risk of a funding crisis. While some would include
the need to plan for growth and unexpected expansion of credit, the risk here is seen more
correctly as the potential for a funding crisis. Such a situation would inevitably be associated
with an unexpected event such as a large charge off, loss of confidence or a crisis of national
proportion such as a currency crisis. In any crisis, risk management here centres on liquidity
facilities and portfolio structure. Recognising liquidity risk leads the bank to recognise
liquidity itself as an asset and portfolio design in the face of illiquidity concerns as a
challenge.
In practice, the concept of liquidity risk is multi-dimensional. It could arise for instance,
when a bank is unable to meet depositors’ demand for immediate cash for their financial
claims. It is also indicated by a bank’s inability to raise funds at normal cost. It can be due to
market liquidity which relates to liquidity crunches because of lack of volume. It could also
be in the nature of asset liquidity risk whereby the lack of liquidity is related to the nature of
assets held by the bank. Liquidity risk in practice is conceptualized as the risk that a sudden
surge in liability withdrawals may leave a bank in a position of having to liquidate assets in a
very short period of time and at low prices (Saunders 1997).
According to Campbell, Lo and Mackinlay (1997), liquidity is necessary for banks to
compensate for expected and unexpected balance sheet functions and to provide funds for
growth. It represents a bank’s ability to efficiently accommodate the redemption of deposits
and other liabilities and to cover funding increases in the loan and investment portfolio. A
bank has adequate liquidity potential when it can obtain needed funds (by increasing
liabilities, securitising or selling assets) promptly and at a reasonable cost. The price of
liquidity is a function of market conditions and the market’s perception of the inherent
riskiness of the borrowing institution.
2.4.1 NEED FOR LIQUIDITY RISK MANAGEMENT
Liquidity risk management lies at the heart of confidence in the banking system. The
background to this is that banks are highly leveraged (Tier 1) in the region of 20:1. Kim and
Santomero (1998) state strongly that the importance of liquidity transcends the individual
bank because a liquidity shortfall at a single institution can have systematic repercussions. It
is in the nature of a bank to transform its liquidities to different maturities on the asset side of
the balance sheet. Since the yield curve is typically upward sloping, the maturity of assets
generally tends to be longer than the liabilities.
Contributing to the subject of banks financing and liquidity, Stulz (1990) was of the view that
the amount of liquid or of readily marketable assets that a bank should hold depends on the
stability of its deposit structure and the potential for raid loan portfolio expansion. Generally,
if deposits are composed primarily of small stable accounts, a bank will need relatively low
liquidity. A much higher liquidity is normally required when a bank has a somewhat high
concentration of large corporate deposit accounts.
In summary, the framework for liquidity risk management has three aspects, namely
measuring and managing net funding requirements, market access and contingency planning.
2.5 INTEREST RATE RISK MANAGEMENT
This is the risk incurred by a bank when the maturity of its assets and liabilities are
mismatched. It is the impact of changing interest rates on a bank’s margin of profits. In order
words, interest rate risk is the risk of decline in a bank’s earnings due to the movements in
interest rates. Elsewhere, Sweeny and Warger (1986) made the point that the combination of
volatile interest rate environment, deregulation and a growing array of no-and-off balance
sheet product has made the management of interest rate risk a growing challenge.
Interest rate risk is the risk of a decline in earnings due to the movements of interest rates.
Long-term interest-bearing assets are more sensitive to interest rate movements. Most of the
items of banks’ balance sheets generate revenues and costs that are interest rate-driven. Since
interest rates are unstable, so are earnings. To drive the central issue home, Dermine (1985)
contents that anyone who lends or borrows is subject to interest rate risk. The lender earning
a variable rate has the risk of seeing revenues reduced by a decline in interest rates; the
borrower paying a variable rate bears higher costs when interest rates increase. But another
perspective, Stone (1974) state that both positions are risky since they generate revenues or
costs indexed to market rates. The other side of the coin is that interest rate exposure
generates chances of gains as well.
Greuning and Bratanovic (2003) posits that banks encounter interest rate risk from four main
sources namely repricing risk, yield curve risk, basis risk, and optionality. The primary and
most often discussed source of interest rate risk stems from timing differences in the maturity
of fixed rates and the repricing of the floating rates of bank assets, liabilities, and off-balance
sheet positions. The basic tool used for measuring repricing risk is duration, which assumes a
parallel shift in the yield curve. Also, repricing mismatches expose a bank to risk deriving
from changes in the slope and shape of the yield curve (nonparallel shifts). Yield curve risk
materialises when yield curve shifts adversely affect a bank‘s income or underlying economic
value. Another important source of interest rate risk is basis risk, which arises from imperfect
correlation in the adjustment of the rates earned and paid on different instruments with
otherwise similar repricing characteristics. When interest rates change, these differences can
give rise to unexpected changes in the cash flows and earnings spread among assets,
liabilities, and off-balance-sheet instruments of similar maturities or repricing frequencies.
In their study of interest rate risk and equity values, Scott and Peterson (1986) explain that
interest rate risk management comprises the various policies, actions and techniques that a
bank can use to reduce the risk of diminution of its net equity as a result of adverse changes
in interest rates.
2.6 MARKET OR SYSTEMATIC RISK
Systematic risk is the risk of asset value change associated with systematic factors. It is
sometimes referred to as market risk which is in fact a somewhat imprecise term. By its
nature, this risk can be hedged, but cannot be diversified completely away. In fact, systematic
risk can be thought of as undiversifiable risk. All investors assume this type of risk wherever
assets owned or claims issued can change in value as a result of broad economic factors. As
such systematic risk comes in many different forms. For the banking sector, however, two are
of greatest concern namely, variations in general level of interest rates and the relative value
of currencies. Because of the banks dependence on these systematic factors, most try to
estimate the impact of these particular systematic risks on performance, attempt to hedge
against and thus limit the sensitivity to variations in undiversifiable factors. Accordingly,
most will track interest rate risk closely.
Market risk arise when banks trade their assets and liabilities rather than holding them for
long-term investments funding or hedging purposes. They are risks incurred in the trading of
assets and liabilities due to changes in interest rates, exchange rates and other asset prices. In
the view of Bessis (2010), “market risk is the risk of adverse deviations of the mark-to-
market value of the trading portfolio due to market movements during the period required to
liquidate the transactions”. It is the risk of losses in on-an off-balance sheet positions arising
from movements in market prices.
According to Opoku-Adarkwa (2011:18), banks are subject to market risk in both the
management of their balance sheets and in their trading operations. Market risk is generally
considered as the risk that the value of a portfolio, either an investment portfolio or a trading
portfolio, will decrease due to the change in value of the market risk factors. There are three
common market risk factors to banks and these are liquidity, interest rates and foreign
exchange rates. Market Risk Management provides a comprehensive framework for
measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as
well as commodity price risk of a bank that needs to be closely integrated with the bank’s
business strategy.
2.7 FOREIGN EXCHANGE RISK
This is the risk incurred when there is an unexpected change in exchange rate altering the
amount of home currency need to repay a debt denominated in foreign currency. Bessis
(2010) defines foreign exchange risk as incurring losses due to changes in exchange rates.
Such loss of earnings may occur due to a mismatch between the value of assets and that of
capital and liabilities denominated in foreign currencies or a mismatch between foreign
receivables and foreign payables that are expressed in domestic currency. According to
Greuning and Bratanovic (2003), foreign exchange risk is speculative and can therefore result
in a gain or a loss, depending on the direction of exchange rate shifts and whether a bank is
net long or net short (surplus or deficit)in the foreign currency.
In principle, the fluctuations in the value of domestic currency that create currency risk result
from long-term macroeconomic factors such as changes in foreign and domestic interest rates
and the volume and direction of a country‘s trade and capital flows. Short-term factors, such
as expected or unexpected political events, changed expectations on the part of market
participants, or speculation based currency trading may also give rise to foreign exchange
changes. All these factors can affect the supply and demand for a currency and therefore the
day-to-day movements of the exchange rate in currency markets.
Foreign exchange risk is generally considered to comprise of transaction risk, economic risk
and revaluation risk. Transaction risk is the price-based impact of exchange rate changes on
foreign receivables and foreign payables, that is, the difference in price at which they are
collected or paid and the price at which they are recognised in local currency in the financial
statements of a bank or corporate entity. Alternatively known as business risk, economic risk
relates to the impact of exchange rate changes on a country‘s long-term or a company‘s
competitive position. With increasing globalization, capital moves quickly to take advantage
of changes in exchange rates and therefore devaluations of foreign currencies can lead to
increased competition in both overseas and domestic markets. This phenomenon makes this
component of foreign exchange risk very critical for its management. The third component,
revaluation or translation risk arises when a bank‘s foreign currency positions are revalued in
domestic currency, and when a parent institution conducts financial reporting or periodic
consolidation of financial statements. Banks conducting foreign exchange operations are also
exposed to foreign exchange risk in forms of credit risks such as the default of the
counterparty to a foreign exchange contract and time-zone-related settlement risk.
2.8 SOLVENCY RISK
Commercial banks are involved in international transactions which involve lending to foreign
borrowers. Solvency risk is the risk that the repayments from foreign borrowers may be
interrupted because of interference from foreign governments or other adverse developments
in the borrower’s country which affect the ability to honour loan obligations.
According to Pindyck and Rubinfield (1991), ultimately solvency risk is risk that a bank may
not have enough capital to offset a sudden decline in the value of its assets relative to its
liabilities. Insolvency is a consequence of the outcome of excessive interest rate, market
credit, off-balance sheet foreign exchange, technological sovereign and liquidity risks.
2.9 OPERATIONAL RISK
This is the risk that existing technology or support systems may malfunction or break down.
Operational risk is associated with the problems of accurately processing settling and taking
or making delivery on trades in exchange for cash. Operational risks are those of
malfunctions of the information system, reporting systems, internal risk monitoring rules and
internal procedures designed to take timely corrective actions or the compliance with internal
risk policy rules (Bessis, 2010).
Marshall (2001) notes that in the absence of efficient tracking and reporting of risks, some
important risks remain ignored, do not trigger any corrective action and can result in
disastrous consequences. In essence, operational risk is an “event risk”. There is a wide range
of events potentially triggering losses.
To address operational risk, Jameson (1998) states the need to set up a common classification
of events that should serve as a receptacle for data gathering processes on event frequencies
and costs. Such taxonomy is still flexible and industry standards will emerge in the future.
What follows is a tentative classification. Operational risks appear at different levels such as
people, processes, technical and information technology.
Developments in modern banking environment, such as increased reliance on sophisticated
technology, expanding retail operations, growing e-commerce, outsourcing of functions and
activities, and greater use of structured finance (derivative) techniques that claim to reduce
credit and market risk have contributed to higher levels of operational risk in banks
(Greuning and Bratanovic, 2003).
Opoku-Adarkwa (2011:24), notes that the recognition of the above-mentioned contributory
factor in operational risk has led to an increased attention on the development of sound
operational risk management systems by banks with the initiative being taken by the Basel
Committee on Banking Supervision. The Committee addressed operational risk in its Core
Principles for Effective Banking Supervision (1997) by requiring supervisors to ensure that
banks have risk management policies and processes to identify, assess, monitor, and control
or mitigate operational risk. In its 2003 document, Sound Practices for the Management and
Supervision of Operational Risk, the Committee further provided guidance to banks for
managing operational risk, in anticipation of the implementation of the Basel II Accord,
which requires a capital allocation for operational risks. Despite all these efforts by the
regulators at addressing operational risk, practical challenges exist when it comes to its
management. In the first place, it is difficult to establish universally applicable causes or risk
factors which can be used to develop standard tools and systems of its management since the
events are largely internal to individual banks.
2.10 MODEL RISK
Model risk is significant in the market universe, which traditionally makes relatively
intensive usage of models for pricing purposes. Model risk is growing more important with
the extension of modelling techniques to other risks, notably credit risk, where scarcity of
data remains a major obstacle for testing the reliability of inputs and models. Models risk
materialises, for instance, as gaps between predicted values of variables, such as the VaR and
actual values observed from experience. Pricing models used for market instruments predict
prices which are readily comparable to observed prices.
2.11 RISK MODELLING
Tracking risks for management purposes requires models for better capturing risks and
relating them to instrumental controls. Fishelson-Holstine as cited in Mays (1998), opines
that the first consideration in model development should be to understand the business
objective and thereafter to decide if the model required should be predictive or descriptive.
He opines that a predictive model seeks to identify and mathematically or quantitatively
represent underlying relationships in the data that are not simply temporary anomalies,
whereas the benefit of descriptive models is the insight they provide. By contributing
valuable information about a portfolio, descriptive models can influence the types of
decisions to be made.
Effective risk management relies on quantitative measures of risk which are provided by
predictive models. Risk models have two major contributions namely measuring risks and
relating these measures to management controls over risk. Banking risk models address both
issues in embedding the specific of each major risk. Summarising, risk models combine four
main building blocks:
(a) Risk drivers and standalone risk of transactions: Risk drivers are all factors
influencing risks, which are necessary inputs for measuring the risk of individual
transactions. When considering in isolation, the intrinsic of a transaction is
‘standalone’.
(b) Portfolio risk: Portfolio models aim to capture the diversification effect that makes
the risk of portfolio transactions smaller than the sum of the risks of the individual
transactions. They serve to measure the economic capital under the VaR
methodology.
(c) Top-down and bottom-up links: These links relate global risk to individual
transaction risks or sub-portfolio risks. They convert global risk and return targets into
risk limits and target profitability for business lines (top-down) and conversely, for
facilitating decision making at the transaction level and for aggregating business line
risks and returns for global reporting purpose (bottom-up).
(d) Risk-adjusted performance measuring and reporting for transactions and
portfolios: Both risk-return profiles feed the basic risk processes. Profitability and
limit setting, providing guidelines for risk decision and risk monitoring.
2.12 BANKING REGULATION AND RISK MANAGEMENT
Regulations have several goals: improving the safety of the banking industry by imposing
capital requirements in line with bank’s risks; levelling the competitive playing field of banks
through setting common benchmarks for all players; promoting sound business and
supervisory practices. Regulations have decisive impact on risk management. According to
Keeley (1988), the regulatory framework sets up the constraints and guidelines that inspire
risk management practices and stimulates the development and enhancement of the internal
risk model and processes of banks. Regulations promote better definition of risks and create
incentives for developing better methodologies for measuring risks. They impose recognition
of the core concept of the capital, stating that banks’ capital should be in line with risks and
that defining capital requirements implies a quantitative assessment of risks.
The existing Accord on credit risk dates from 1988. The Accord Amendment for market risk
(1996) and the New Basel Accord (2001) provide very significant enhancement of risk
measures. The existing accord imposed capital charge against credit risk. The amendment
provided a standardized approach for dealing with market risk and offered the opportunity to
use internal models subject to validation by the supervisory bodies, allowing banks use their
own models for assessing the market risk capital. The new accord imposes a higher
differentiation of credit risk based on additional risk inputs characterizing banks facilities. By
doing so, it paves the way towards internal credit risk modelling already instrumental in
major institution.
Matten (2000:18) expressed the view that regulators face several dilemmas when attempting
to control risks. Regulation and competition conflict since many regulations restrict the
operations of banks. New rules may create unpredictable behaviour to turn around the
associated constraints. For this reason, regulators avoid making brutal changes in the
environment that would generate other uncertain.
2.13 RISK MANAGEMENT AND BANK PERFORMANCE
According to Eduardus, Hermeindito, Putu and Supriyatna (2007:20), a major objective of
bank management is to increase shareholders’ return epitomising bank performance. The
objective often comes at the cost of increasing risk. Banks face various risks such as interest
risk, market risk, credit risk, off-balance risk, technology and operational risk, foreign
exchange risk, country risk, liquidity risk and insolvency risk. The bank’s motivation for risk
management comes from those risks which can lead to bank under performance.
Tai (2004) states that issues of risk management in banking sector have greater impact not
only on the bank but also on the economic growth. Tai concludes that some empirical
evidence indicates that past return shocks emanating from banking sector have significant
impact not only on the volatilities of foreign exchange and aggregate stock markets, but also
on their prices, suggesting that banks can be a major source of contagion during the crisis.
Banks which better implement the risk management may have some advantages:
(i) It is in line with obedience function toward the rule.
(ii) It increases their reputation and opportunity to attract more wide customers in
building their portfolio of fund resources.
(iii) It increases their efficiency and profitability.
Cebenoyan and Strahan (2004) find evidence that banks which have advanced in risk
management have greater credit availability, rather than reduced risk in the banking system.
The greater credit availability leads to the opportunity to increase the productive assets and
banks’ profit.
Both bank performance and risk management are dependent on implementing good corporate
governance; hence, the two constructs are interrelated by nature. Interrelationship between
the two represents the risk and return trade-off. When banks manage their risk better, they
will get advantage to increase their performance (return). Better risk management indicates
that banks operate their activities at lower relative risk and at lower conflict of interest
between parties. These advantages of implementing better risk management lead to better
banks performance. Better bank performance increases their reputation and image from
public or market point of view. The banks also get more opportunities to increase the
productive assets, leading to higher bank profitability (Cebenoyan and Strahan 2004).
Al-Khouri in Kolapo, Ayeni and Oke (2012:34) assessed the impact bank’s specific risk
characteristics and the overall environment on the performance of 43 commercial banks
operating in 6 of the Gulf Cooperation Council (GCC) countries over the period of 1998-
2008. Using fixed effects regression analysis, result showed that credit risk, liquidity risk and
capital risk are the major factors that affect bank performance when profitability is measured
by return on assets while the only risk that affects profitability when measured return on
equity is liquidity risk.
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CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
This chapter describes in detail the procedure used in carrying out the research work. It
explains the approach employed by the researcher in collecting data from both primary and
secondary sources, as well as the research design, data collection instrument and the
procedure for data processing.
3.1 RESEARCH DESIGN
The researcher collected data for the research from both primary and secondary sources using
a structured approach. This study utilized a survey research design because of the type of
information needed. Survey research is one which involves the assessment of public opinion,
beliefs, attitudes and motivation using questionnaire and sampling techniques.
The researcher used data gathered from the banks as contained in the banks’ annual audited
financial reports and information obtained from operation staff and officers in-charge of risk
management who responded to a set of questions on various aspects of risk management.
3.2 AREA OF STUDY
The banks studied were all Nigerian banks that had branches in Enugu State and their head
offices in Lagos. These banks were engaged in universal banking which imply that they
offered a broad range of financial services, including pure banking services, capital market
services as well as insurance products and services.
3.3 POPULATION OF THE STUDY
The target population was banks in Enugu State. Three (3) banks were selected and had been
in operation since early 1990s. The banks are First Bank of Nigeria Plc, United Bank for
Africa Plc and Diamond Bank.
3.4 SAMPLING SIZE
A total of 130 staff of the banks including operations staff and Officers in-charge of risk
management were administered questionnaire. This is made up as follows: First Bank 70
staff, UBA 40 staff and 20 Diamond Bank staff. A sample size of 98 was used, comprising
First bank 53, UBA 30 and Diamond Bank 15.
Taro Yamane formula was used to arrive at this sample size. The formula is stated below:
N
n = 1 + N (℮) ²
Where n = Sample size
N = Total Population
e = Acceptable error limit (0.05)
1 = Unity ( it is constant)
3.5 METHOD OF DATA COLLECTION
Structured questionnaire was used to collect data for this work. The questionnaire items were
generated through a review of available literatures and was administered and analyzed by the
researcher. Direct administration of this questionnaire was to allow for free interaction
between the researcher and the respondents.
3.6 INSTRUMENT OF DATA COLLECTION
Questionnaire and historical documentations were used as instrument of data collection. The
questionnaire was from the factors identified during the review of literature. The research
questions, objectives of the study and the hypotheses formulated were considered in raising
the questionnaire.
3.7 VALIDITY OF THE INSTRUMENT
Validity is the process of ascertaining the extent to which the instrument measures what it
purports to measure. In order to ensure the validity of the research instrument, proper
structuring of the questionnaire and a conduct of a pre-test of all the questions contained in
the questionnaire was carried out. However, the researcher used content validity to ensure the
validity of the instrument. Content validity is concerned with how well the content of the
instrument samples the kinds of things about which conclusions are to be drawn. Content
validity ensures that the sample size of the population is a representation of the variables the
instrument will measure.
3.8 METHOD OF DATA ANALYSIS
The data collected were arranged and analysed based on the hypotheses formulated and the
research questions. The Chi-square statistical approach was used in testing the acceptability
or otherwise of the hypotheses posed in this research question.
The Chi-square formula is given below:
X² = ∑ (fo –fe)²
fe
X 2 = Value of Chi-square
Where: fo = Observed frequency
fe = Expected frequency
∑ = Summation
Bowleye proportional allocation formula was used to determine the exact number of each
category in the sample size. That is:
nh = nNh
N
Where: nh = Categories sample size
n = Sample size
Nh = Categories Population
N = Total Population size
UBA Staff = 98 x 40 = 30
130
First Bank Staff = 98 x 70 = 53
130
Diamond Bank Staff = 98 x 20 = 15
130 98
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CHAPTER FOUR
PRESENTATION ANALYSIS AND INTERPRETATION OF DATA
The essence of this chapter is to present and analyse the data collected for the study. The
presentation and interpretation of data were based on questionnaire administered to the staff
of the selected banks in Enugu. A total of 98 questionnaires were distributed and 88 retrieved
or collected from respondents having answered the questions therein.
4.1 PRESENTATION AND ANALYSIS OF DATA
Table 4.1: Questionnaires Distributed and Retrieved.
Bank No Distributed No Retrieved Responds percentage%
UBA 30 26 87
Diamond Bank 15 13 87
First Bank 53 49 92
Total 98 88 90
Source: Field Survey; 2014
The above table shows high percentage of response from the population surveyed; hence
there is an overall response percentage of 90%. This shows that most of respondents were
interested in the research topic and understood the questions contained on the questionnaire
very well.
Research Question 1: What are the risks encountered by your bank?
Question a: Interest rate is encountered by the banks?
Table 4.3: Data on interest rate risk encountered by banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 3 1 - 4 5
Strongly Agree 11 - 43 54 61
Do not Agree 5 9 6 20 23
Indifferent 7 3 - 10 11
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table above shows that a total of 4 or 5% of the respondents agree that interest rate risk
is encountered by banks in Enugu State, 54 or 61% of the respondents strongly agreed, while
20 or 23% do not agree and 10 or 11% respondents were indifferent.
Question b: The bank has Operational and Technological risk?
Table 4.4: Data on Operational and Technological risks encountered by banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 9 3 2 14 16
Strongly Agree 17 10 47 74 84
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table depicts that a total of 74 or 84% of the respondents strongly agree that the banks
have operational and technological risk, 14 or 16% of the respondents agreed, while none of
the respondents indicated do not agree or indifferent.
Question c: Market risk is one of the risks encountered my bank?
Table 4.5: Market risk as one of the risks encountered by banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree - - - - -
Strongly Agree - - - - -
Do not Agree 22 11 43 76 86
Indifferent 4 2 6 12 14
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
Table 4.5 shows that none of the respondents indicated agree or strongly agree, 76 (86%) of
the respondents indicated do not agree while 12 (14%) indicated indifferent. This implies that
market risk is not encountered by the banks in Enugu State.
Question d: Is liquidity risk is a major challenge facing the bank?
Table 4.6: Data collected on liquidity risk as a major challenge facing the banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 6 2 10 18 20
Strongly Agree 18 10 30 58 66
Do not Agree 2 1 4 7 8
Indifferent - - 5 5 6
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
Table shows that 18 (20%) of the respondents indicated agree, strongly agree 58 (66%)
respondents, do not agree 7 (8%) and 5 (6%) of the respondents indicated indifferent. This
means that credit risk is encountered by the banks.
Question e: Credit risk is encountered by my bank?
Table 4.7: Data showing Credit risk as one of the risks encountered by banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 4 1 2 7 8
Strongly Agree 20 12 41 73 83
Do not Agree 2 - 6 8 9
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
Table shows that 7 (8%) of the respondents indicated agree, 73 (83%) indicated strongly
agree while 8 (9%) do not agree and none of the respondents indicated indifferent. This
means that market risk is major challenge facing the banks.
Question f: Insolvency risk is encountered by my bank?
Table 4.8: Data collected on insolvency risk as encountered by the banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 5 - 2 7 8
Strongly Agree - - 4 4 5
Do not Agree 19 9 40 68 77
Indifferent 2 4 3 9 10
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
From table 4.8 above 7 (8%) of the respondents indicated agree, 4 (5%) strongly agreed, 66
(77%) respondents do not agree and 9 (10%) of the respondents indicated indifferent. This
shows that insolvency risk is not a challenge facing the banks.
Having exhaustively analysed the questions administered for testing hypothesis one, a
compressed result for the individually analysed questions are presented below.
Table 4.9: Condensed response of the six questions for testing hypothesis one.
ORGANISATION SA A NA IND TOTAL
UBA 66 27 50 13 156
Diamond Bank 32 7 30 19 78
First Bank 165 16 99 14 294
Grand Total 263 50 179 36 528
Source: Survey data, 2014
After getting the grand total for the compressed analysis, aggregate response of the three
organisations are:
Table 4.10: Aggregate response of the three banks
Source: Field Survey, 2014
Research Question 2: What are the risk management practices among Commercial
banks?
Question a: Understandings of the issues of risk are well communicated to all staff?
Table 4.11: Understandings of the issues of risk by bank staff.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 6 1 3 10 11
Strongly Agree 20 12 46 78 89
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
RATING RESPONSE PERCENTAGE (%)
Strongly Agree 263 50
Agree 50 9
Not Agree 179 34
Indifferent 36 7
Total 528 100
The table above shows that 10 (11%) of the respondents indicated agree, 78 (89%) strongly
agreed whereas no respondent either indicated do not agree or indifferent. It then means that
understandings of the issues of risk are well communicated to all staff.
Question b: It is necessary to formally take risk analysis into consideration for investment
appraisal?
Table 4.12: Data on necessity of formally taking risk analysis into consideration for
investment appraisal.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 9 4 6 19 22
Strongly Agree 17 9 43 69 78
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table shows that 19 (22%) of the respondents indicated agree, 69 (78%) strongly agreed
whereas no respondent either indicated do not agree or indifferent. This depicts risk analysis
is formally taken into consideration for investment appraisal.
Question c: Credit rating and scoring system is strictly adhered to?
Table 4.13: Interpretation of data collected on credit rating and scoring system
adherence.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 10 3 7 20 23
Strongly Agree 16 10 42 68 77
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table shows that a total number of 20 (23%) of the respondents indicated agree, 68 (77%)
strongly agreed whereas no respondent either indicated do not agree or indifferent. It means
that credit rating scoring system is strictly adhered to by the banks.
Question d: Existing measurement tools effectively predict credit risk and other risks?
Table 4.14: Effectiveness of measurement tools in predicting credit risk and other risks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 12 4 6 22 25
Strongly Agree 10 9 40 59 67
Do not Agree - - 3 3 3
Indifferent 4 - - 4 5
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
Table 4.11 shows that 22 (25%) of the respondents indicated agree, 59 (67%) strongly agreed
whereas 3 (3%) of respondents either indicated do not agree and 4 (5%) indicated indifferent.
It shows that existing measurement tools effectively predict credit risk and other risks.
Having exhaustively analysed the questions administered under research question two, a
compressed result for the individually analysed questions is presented below.
Table 4.15: Condensed response of the four questions for testing hypothesis two.
ORGANISATION SA A NA IND TOTAL
UBA 63 37 0 4 104
Diamond Bank 40 12 0 0 52
First Bank 171 22 3 0 196
Grand Total 274 71 3 4 352
Source: Field Survey, 2014
Table 4.16: Aggregate response of the three banks.
Source: Field Survey, 2014
Research Question 3: To what extent does the existing legal and regulatory provisions
support sound risk management practices among Nigerian banks?
Question a: The introduction of the Prudential Guidelines by the regulatory authority (the
CBN) has ensured qualitative risk management among banking institutions in Nigeria?
Table 4.17: Effect of the Prudential Guidelines on qualitative risk management among
banking institutions in Nigeria.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 19 9 41 69 78
Strongly Agree 7 4 8 19 22
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table shows that 69 (78%) of the respondents indicated agree, 19 (22%) strongly agreed
whereas no respondent indicated do not agree or indifferent. It shows that the prudential
guidelines by the regulatory authority to some extent ensure qualitative risk management
among banking institutions in Nigeria.
RATING RESPONSE PERCENTAGE (%)
Strongly Agree 274 78
Agree 71 20
Not Agree 3 1
Indifferent 4 1
Total 352 100
Question b: Regulatory framework sets up the constraints and guidelines that inspire risk
management practices and stimulates the internal risk model and process of banks.
Table 4.18: Data on effect of Regulatory framework on risk management practices.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 6 3 13 22 25
Strongly Agree 20 10 36 66 75
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table shows that 22 (25%) of the respondents indicated agree, 66 (75%) strongly agreed
whereas no respondent indicated do not agree or indifferent. This shows that regulatory
framework sets up the constraints and guidelines that inspire risk management practices and
stimulates the internal risk model and process of banks among banking institutions in Nigeria.
Question c: Nigerian banks have clearly stated risk management policies?
Table 4.19: Interpretation of data on risk management policies in Nigerian banks.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 9 2 7 18 20
Strongly Agree 17 11 42 70 80
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table indicates that 18 (20%) of the respondents indicated agree, 70 (80%) strongly
agreed while no respondent indicated do not agree or indifferent. This means that Nigerian
banks have clearly stated risk management policies.
After the analysis of questions administered for testing hypothesis three, a compressed result
of the individually analysed questions is presented below.
Table: 20: Compressed response of the three questions for testing hypothesis three.
ORGANISATION SA A NA IND TOTAL
UBA 44 34 0 0 78
Diamond Bank 25 14 0 0 39
First Bank 48 61 0 0 109
Grand Total 117 109 0 0 226
Source: Survey data, 2014
Table 4.21: Aggregate response of the three banks.
Source: Survey data, 2014
Research Question 4: What effects do risks management have on performance of
Commercial Banks in Enugu State?
Question a: Risk management enables banks to achieve sustained market price stability,
protect and grow return on investment.
Table 4.22: Effects of risk management in achieving sustainable market price stability,
protection and return on investment.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 8 10 12 30 34
Strongly Agree 17 3 34 54 61
Do not Agree 1 - 3 4 5
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
RATING RESPONSE PERCENTAGE (%)
Strongly Agree 117 52
Agree 109 48
Not Agree 0 0
Indifferent 0 0
Total 226 100
The table above shows that 30 (34%) of the respondents indicated agree, 54 (61%) strongly
agreed while 4 (5%) respondents indicated do not agree and none indicated indifferent. It
means that risk management enables banks to achieve sustained market price stability, protect
and grow return on investment.
Question b: Effective risk management facilitates the achievement of the goal of
maximization of shareholders wealth?
Table 4.23: Interpretation of data on effectiveness of risk management in achieving the
goal of maximization of shareholders wealth.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 13 7 36 56 64
Strongly Agree - - 5 5 6
Do not Agree 11 6 - 17 19
Indifferent 2 - 8 10 11
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
From the table above 56 (64%) of the respondents indicated agree, 5 (6%) strongly agreed, 17
(19%) respondents indicated do not agree whereas 10 (11%) indicated indifferent. It means
that effective risk management to some extent facilitates the achievement of the goal of
maximization of shareholders wealth.
Question c: There is correlation between bank failure and poor risk management?
Table 4.24: Data on the correlation between bank failure and poor risk management.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 3 5 2 10 11
Strongly Agree 23 8 47 78 89
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table above depicts that 10 (11%) of the respondents indicated agree, 78 (89%) strongly
agreed and none of the respondents indicated do not agree and indifferent. It shows that there
is correlation between bank failure and poor risk management.
Question d: Effective evaluation of risk management is a critical component for
enhancement of investment/bank performance?
Table 4.25: Interpretation of data on the effects risk management on investment/bank
performance.
Rating UBA Diamond Bank First Bank Total Percentage %
Agree 4 2 7 13 16
Strongly Agree 22 11 42 75 85
Do not Agree - - - - -
Indifferent - - - - -
TOTAL 26 13 49 88 100
Source: Field Survey; 2014
The table shows that 13 (16%) of the respondents indicated agree, 75 (85%) strongly agreed,
while none of the respondents indicated do not agree or indifferent. It means that effective
evaluation of risk management is a critical component for enhancement of investment/bank
performance.
Having exhaustively analysed the questions under the research question four, a compressed
result for the individually analysed questions are presented below.
Table 4.26: Condensed response of the four questions for testing hypothesis four
ORGANISATION SA A NA IND TOTAL
UBA 62 28 12 2 104
Diamond Bank 22 24 6 0 52
First Bank 128 57 3 8 196
Grand Total 212 109 21 10 352
Source: Field Survey, 2014
After getting the grand total for the compressed analysis, aggregate response from the three
organisations are:
Table 4.27: Aggregate response of the three banks
Source: Field Survey, 2014
4.2 TEST OF HYPOTHESES
In this section, the researcher validated the four hypotheses of the research work. In testing
the hypotheses formulated, Chi-square (X²) statistical tool was used.
4.2.1 DECISION RULE
Accept the null hypothesis (Ho) if the calculated Chi-square value is less than the critical
value of the Chi-square distribution table, otherwise reject the null hypothesis and accept the
alternate hypothesis (Hi). That is; Accept: Ho if Xt2 ≥ Xc
2 and reject Hi
Where: Xt2
= Critical Value of Chi-square
Xc2
= Calculated Chi-square
4.2.2 OPERATIONAL ASSUMPTION
1. Level of significance = 5%
2. Degree of freedom = (r – 1) (c – 1)
3. Expected data = Row total x Column total
Total value
4. Critical value = (4 – 1) (3 – 1)
= 3 x 2
RATING RESPONSE PERCENTAGE (%)
Strongly Agree 212 60
Agree 109 31
Not Agree 21 6
Indifferent 10 3
Total 528 100
= 6
= 12.592
4.2.3 TEST OF HYPOTHESIS ONE
Ho: Commercial banks in Enugu State do not encounter any risk.
Hi: There are significant risks encountered by Commercial banks in Enugu State.
In testing the hypothesis, the condensed response of the research question; what are the risks
encountered by your bank? was used.
Table 4.28: Response on the risks encountered by banks.
ORGANISATION SA A NA IND TOTAL
UBA 66 27 50 13 156
Diamond Bank 32 7 30 19 78
First Bank 165 16 99 14 294
Grand Total 263 50 179 36 528
Source: Survey data, 2014
Using Chi-square formula: X² = ∑ (fo –fe)²
fe
Where: X² = Chi-square
fo = Observed frequency
fe = Expected frequency
∑ = Summation
Expected frequency = Row total x Column total
Total value
a. 156 x 263 = 77.70
528
b. 156 x 50 = 14.77
528
c. 156 x 179 = 52.89
528
d. 156 x 36 = 10.64
528
e. 78 x 263 = 38.85
528
f. 78 x 50 = 7.39
528
g. 78 x 179 = 26.44
528
h. 78 x 36 = 5.32
528
i. 294 x 263 = 146.44
528
j. 294 x 50 = 27.84
528
k. 294 x 179 = 99.67
528
l. 294 x 36 = 20.05
528 528
fo Fe fo-fe (fo-fe)2 (fo-fe)
2 /fe
66 77.70 -11.7 136.89 1.761776062
27 14.77 12.23 149.5729 10.12680433
50 52.89 -2.89 8.3521 0.157914539
13 10.64 2.36 5.5696 0.523458646
32 38.85 -6.85 46.9225 1.207786358
7 7.39 -0.39 0.1521 0.020581867
30 26.44 3.56 12.6736 0.479334341
9 5.32 3.68 13.5424 2.54556391
165 146.44 18.56 344.4736 2.352319039
16 27.84 -11.84 140.1856 5.035402299
99 99.67 -0.67 0.4489 4.503862747
14 20.05 -6.05 36.6025 1.825561097
528 528 0 30.54036524
Source: Field Survey, 2014
DECISION: The calculated Chi-square value (X2c) is far greater than the critical value of the
Chi-square distribution table (X2
t) (ie 30.540 > 12.592). Therefore, we reject the null
hypothesis (Ho) but accept the alternate hypothesis (Hi). This implies that there are
significant risks encountered by the Commercial banks in Enugu State.
4.2.4 TEST OF HYPOTHESIS TWO
Ho: There are no effective risk management practices among Commercial banks in
Enugu State.
Hi: There are effective risk management practices among Commercial banks in
Enugu State.
The condensed response of the research question; “how adequate is the risk management
practices among Commercial banks” was used in testing the hypothesis.
Table 4.29: Response on the adequacy of risk management practices among Commercial
Banks
ORGANISATION SA A NA IND TOTAL
UBA 63 37 0 4 104
Diamond Bank 40 12 0 0 52
First Bank 171 22 3 0 196
Grand Total 274 71 3 4 352
Source: Field Survey, 2014
Using Chi-square formula: X² = ∑ (fo –fe)²
fe
Expected frequency = Row total x Column total
Total value
a 104 x 274 = 80.95
352
b 104 x 71 = 20.98
352
c. 104 x 3 = 0.89
352
d. 104 x 4 = 1.18
352
e. 52 x 274 = 40.48
352
f. 52 x 71 = 10.49
352
g. 52 x 3 = 0.44
352
h. 52 x 4 = 0.59
352
i 196 x 274 = 152.57
352
j. 196 x 71 = 39.53
352
k. 196 x 3 = 1.67
352
l. 294 x 4 = 2.23
352 352
fo fe fo-fe (fo-fe)2 (fo-fe)
2 /fe
63 80.95 -17.95 322.2025 3.980265596
37 20.98 16.02 256.6404 12.23262154
0 0.89 -0.89 0.7921 0.89
4 1.18 2.82 7.9524 6.739322034
40 40.48 -0.48 0.2304 5.691699605
12 10.49 1.51 2.2801 0.217359389
0 0.44 -0.44 0.1936 0.44
0 0.59 -0.59 0.3481 0.59
171 152.57 18.43 339.6649 2.226288917
22 39.53 -17.53 307.3009 7.773865419
3 1.67 1.33 1.7689 1.059221557
0 2.23 -2.23 4.9729 2.23
352 352 0 44.07064405
Source: Field Survey, 2014
DECISION: The calculated Chi-square value (X2c) is far greater than the critical value of the
Chi-square distribution table (X2t) (44.070 > 12.592). Therefore, we reject the null hypothesis
(Ho) and accept the alternate hypothesis (Hi). This means that there are effective risk
management practices among Commercial banks in Enugu State.
4.2.5 TEST OF HYPOTHESIS THREE
Ho: The existing legal and regulatory provisions do not support sound risk
management practice among Nigerian banks.
Hi: The existing legal and regulatory provisions support sound risk management
practice among Nigerian banks.
This hypothesis was tested using the condensed response of the research question: To what
extent does the existing legal and regulatory provisions support sound risk management
practices among Nigerian banks?
Table 4.30 Response of legal and regulatory provisions support of sound risk
management among Nigerian banks.
ORGANISATION SA A NA IND TOTAL
UBA 44 34 0 0 78
Diamond Bank 25 14 0 0 39
First Bank 48 61 0 0 109
Grand Total 117 109 0 0 226
Source: Survey data, 2014
Using Chi-square formula: X² = ∑ (fo –fe) ²
fe
Expected frequency = Row total x Column total
Total value
a 78 x 117 = 40.38
226
b 78 x 109 = 37.62
226
c. 78 x 0 = 0
226
d. 78 x 0 = 0
226
e. 39 x 117 = 20.19
226
f. 39 x 109 = 18.81
226
g. 39 x 0 = 0
226
h. 39 x 0 = 0
226
i 109 x 117 = 56.43
226
j. 109 x 109 = 52.57
226
k. 109 x 0 = 0
226
l. 109 x 0 = 0
226 226
fo fe fo-fe (fo-fe)2 (fo-fe)
2 /fe
44 40.38 3.62 13.1044 0.324526993
34 37.62 -3.62 13.1044 0.348335991
0 0 0 0 0
0 0 0 0 0
25 20.19 4.81 23.1361 1.145918772
14 18.81 -4.81 23.1361 1.229989367
0 0 0 0 0
0 0 0 0 0
48 56.43 -8.43 71.0649 1.259936093
61 52.57 8.43 71.0649 1.35184723
0 0 0 0 0
0 0 0 0 0
226 226 0 5.660521939
Source: Field Survey, 2014
DECISION: The calculated Chi-square value (X2
c) is less than the critical value of the Chi-
square distribution table (X2
t) (ie 5.660 < 12.592). Therefore, we reject the alternate
hypothesis (Hi) and accept the null hypothesis (Ho). It means that the existing legal and
regulatory provisions do not effectively support sound risks management in Nigerian banks.
4.2.6 TEST OF HYPOTHESIS FOUR
Ho: Risk management has no positive effects on the performance of banks in
Enugu State.
H1: Effective risk management has significant effects on the performance of banks
in Enugu State.
The hypothesis was tested using the condensed response of the research question: What effect
do risks have on performance of Commercial banks?
Table 4.31: Response on effects risks on Commercial banks performance.
ORGANISATION SA A NA IND TOTAL
UBA 62 28 12 2 104
Diamond Bank 22 24 6 0 52
First Bank 128 57 3 8 196
Grand Total 212 109 21 10 352
Source: Field Survey, 2014
Using Chi-square formula: X² = ∑ (fo –fe)²
fe
Expected frequency = Row total x Column total
Total value
a 104 x 212 = 62.64
352
b 104 x 109 = 32.20
352
c. 104 x 21 = 6.20
352
d. 104 x 10 = 2.95
352
e. 52 x 212 = 31.33
352
f. 52 x 109 = 16.10
352
g. 52 x 21 = 3.10
352
h. 52 x 10 = 1.48
352
i 196 x 212 = 118.05
352
j. 196 x 109 = 60.69
352
k. 196 x 21 = 11.69
352
l. 196 x 10 = 5.57
352 352
Fo fe fo-fe (fo-fe)2 (fo-fe)
2 /fe
62 62.64 -0.64 0.4096 6.538952746
28 32.20 -4.2 17.64 0.547826087
12 6.20 5.8 33.64 5.425806452
2 2.95 -0.95 0.9025 0.305932203
22 31.33 -09.33 87.0489 2.778451963
24 16.10 7.9 62.41 3.876397516
6 3.10 2.9 8.41 2.712903226
0 1.48 -1.48 2.1904 1.48
128 118.05 9.95 99.0025 0.838648877
57 60.69 -3.69 13.6161 0.224354918
3 11.69 -8.69 75.5161 6.459888794
8 5.57 2.43 5.9.049 1.060125673
352 352 0 32.24928846
Source: Field Survey, 2014
DECISION: The calculated Chi-square value (X2
c) is greater than the critical value of the
Chi-square distribution table (X2
t) (ie 32.249 > 12.592). Therefore, we reject the null
hypothesis (Ho) and accept the alternate hypothesis (Hi). This indicates that effective risk
management has significant effects on the performance of banks in Enugu State.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
This chapter summarises the findings of this research work. It also provides conclusions
drawn from the findings and makes recommendations that may be helpful to the banks,
economic policy makers and the regulatory authority responsible for regulating the activities
of banks in the Nigerian economy.
5.1 SUMMARY OF FINDINGS
• The study has established that there are significant risks encountered by Commercial
banks in Enugu State.
• The banks have adequate measures and processes of monitoring and controlling risks
that ensure proper risk management practices.
• The existing legal and regulatory provisions do not effectively support sound risk
management.
• As a result of effective risk management, banks performance has tremendously
increased. It enable banks to achieve sustainable market price stability, protect and
grow return on investment, also increases their efficiency and profitability.
5.2 CONCLUSIONS
The results obtained from the research clearly support the assertion that effective risk
management contributed to a greater extent to the performance of banks in Enugu State.
Therefore, effective risk management is important in banks and allows them to improve their
performance and prevent bank failure, to achieve that, banks should have positive risk
management culture, legal and regulatory provisions or policies strengthen.
5.3 RECOMMENDATIONS
The reason for risk management is for better performance and to prevent bank distress.
Consequent upon the findings and conclusions drawn from this work, the following
recommendations were made:
• Banks in Enugu State should enhance their capacity in risk management, there should
be effective, efficient and comprehensive risk management process to identify
measure, monitor and control risks.
• There is also the need for banks in Enugu State to adopt sound corporate governance
practices, manage their risks in an integrated approach and focus mainly on core
banking activities.
• The existing legal and regulatory provisions should be looked into and amended
where necessary and there should also be periodical review of the operations and
performances of banks by the regulatory authority to ensure that banks operate in
accordance with the relevant provisions of the Bank and Other Financial Institutions
Act (BOFIA 1999) and Prudential Guidelines.
5.4 CONTRIBUTION TO KNOWLEDGE
This research work contributed to the existing pool of works or studies on risk management
in banks which other researchers have carried out in the past. It is believed that banks in
Enugu State will find this research useful as it will help risk managers mitigate risks
associated with their operations, thereby improve profitability.
5.5 SUGGESTION FOR FURTHER RESEARCH
This study only investigated the effects of risk management on the performance of selected
banks in Enugu State, Nigeria. It will provide a guide for further studies on risk management
in the banking industry. Also further study should be focused on the impacts of risk
management on the wealth return of banks shareholders.
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APPENDIX 1
EFFECT OF RISK MANAGEMENT ON THE PERFORMANCE OF
SELECTED COMMERCIAL BANKS IN ENUGU STATE.
I am a Post-graduate student of University of Nigeria, Enugu currently carrying out research
on Effects of Risk Management on the Performance of Selected Commercial Banks in Enugu
State.
This questionnaire is designed to obtain information on various aspects of risk management
in your bank; the information given will be utilized solely for this study and will be treated
with utmost confidentiality.
SECTION A: BANK
United Bank for Africa
First Bank
Diamond Bank
SECTION B: RESEARCH QUESTION
Kindly supply answers to the questions below by selecting one of the options as appropriate
in the box.
KEY: A = Agree, SA = Strongly Agree, NA = Not Agree, IND = Indifferent
S/N QUESTION A SA NA IND
1. What are the risks encountered by your bank?
a. Interest rate risk is encountered by my bank
b. The bank has Operational and Technological risk
c. Market risk is one of the risks encountered by my bank
d. Liquidity risk is a major challenge facing the bank
e. Credit risk is encountered by my bank
f. Insolvency risk is encountered by the bank
2.
What are the risk management practices among
Commercial Banks in Enugu State?
Thank you.
a. The understandings of the issues of risk are well
communicated to all staff.
b. It is necessary to formally take risk analysis into
consideration for investment appraisal.
c. Credit rating and scoring system is strictly adhered to
d. Existing measurement tools effectively predict credit risk and
other risks.
3. To what extent does the existing legal and regulatory
provisions support sound risk management practices
among Nigerian banks?
a. The introduction of the Prudential Guidelines by the
regulatory authority (the CBN) has ensured qualitative risk
management among banking institutions in Nigeria.
b. Regulatory framework sets up the constraints and guidelines
that inspire risk management practices and stimulates the
internal risk model and process of banks.
c. Nigerian banks have clearly stated risk management policies
4. What effects do risks management have on performance
of Commercial banks?
a. Risk management enables banks to achieve sustained market
price stability, protect and grow return on investment.
b. Effective risk management facilitates the achievement of the
goal of maximization of shareholders wealth.
c. There is correlation between bank failure and poor risk
management.
d. Effective evaluation of risk management is a critical
component for enhancement of investment/ bank
performance.