RISK MANAGEMENT IN COMMERCIAL BANK AN APPRAISAL
This study is primarily designed to find out the effectiveness of risk management in the modern banking industry with particular reference to some selected commercial banks. Statistically evident one (1) of a foremost problems confronting risk attributed to lack of education and lack of adequate knowledge of risk management processes. Another factor is the poor economic and technological development based on the above mentioned problems, it is the alm of this study to look into the importance of risk management in the banking industry as well as its contribution to the development of the economy. To this end, effort would be made x-ray some factors considered responsible for the effectiveness of risk management in present day banks. The satisfied technique to be adopted in this study will be chi-square (x2) method of analysis this data to be collected in the course of the study will presented, analyzed and interpreted having the started approaches in mind. In view of this, the finding will be such that risk management department will be established in banks to make control more effective. At the end, the conclusion will be such that the availability of risk management in modern banks is very essential.
1.1 BACKGROUND OF THE STUDY
William (1990) defined risk management discipline whose goals is to protect the asses and profit or an organization by reducing the potential for loss before it occurs and financing through. Insurance and other means potential exposures to catastrophic loss such as acts of God, human error on court judgment. However in practice, the identified exposure through elimination and or reduction and financing the remaining exposures so that the organization in question in the event of a major loss can continue to function without server hardship to its financial stability.
The management for risks in firms is relatively new and as a specialist, management technique has its origin in the United States of America dating back to early igbo. This is so because of the vast technological development the large concentration of values and increasing use of highly sophisticated equipment and products which become permanent features of the 1960’s and 1970’s (Wuther, 1991).
Nevertheless, the level of awareness is still low in developing countries, infact, it was because of the accident, which happened in November 1984 in Blopal India that led to the subject of risk management receiving some attention in most developing countries.
The months following the Blopel incident, the United Nations conference on trade and financial relation to trade (CITT) met in February 1985 in Geneva and passed a resolution requesting that the (UNCTAL) secretarial undertake a study urgently on the applicability of modern risk management techniques to the commercial and industrial enterprises located in developing countries based on this resolution a publication entitled, “the promotion of risk management in developing countries” was published in January 1989, owing to lot of effort to promote the techniques of modern risk management. For instance in Nigeria this was first demonstrated by vice admiral Augustine Alkhoma (Rtd) during the international conferences held in Lagos under the auspicos of the Nigeria faculty of risk management hen he stated “Nigeria at present loses more than N10billion of her human and material assets annually due to the preventing low level of risk awareness and lack of effort directed at loss prevention and risk management”, these loses amount to about 10 percent of the nation, gross domestic product (GDP) and must be allowed to continue the concept of risk management, the banking industry is one of the industries that operates in rapidity changing regulatory and economic environment in addition, sequel to the introduction of structural acknowledgement program (SAP) in the year 1986, the number of banks in the country rose to banks continues to increase this has brought a heavy competitive pressure to the banks and invariably the increase of risk. As competitive pressure opportunities to offer nets products, compete in expanded geographical market and consolidated operations increases the risk faced by the banks also increases. Increases in the word of Koch (1992), “Banks must be able and willing to change or they will disappearing.
This financial management of commercial banks involves selecting the portfolio and misappropriation of products and services offered by a balanced expected returned within assumed risk the greater the expected returns will be.
1.2 STATEMENT OF THE PROBLEM
Through the phenomenal growth of banks in the Nigeria financial institution is seen as a healthy development in the economy, it has also led to increase in crises in the banking industry, he management of banking this era of technology is a very complex affair that involves the sue several management tools, both human and material in order to achieve the corporate goals of bank, the managers of banks exercise a number of management functions, which amongst others includes the management of risk, this is probably the reason why modern risk management functions techniques devised to enable organization to meet up with the ever increasing complex and high value risks to which modern bank operator are exposed the major aim of all bank is to maximize profit to actualize the goal the organization engages in alls ort of complex economic activities which if unforeseen by the organization present a danger. It is therefore imperative that bank seek to identify areas in operation which could constitute potential severity of such an occurrence with a view of ensuring the continuity of its operation.
In the face of increasing competition bank and tend to focus more on how to increase their market share so as to remain viable in the industry sometime with ought to follow and as a result the management of risk exposures in these thanks remains under developed leaving room for losses that are capable of paralyzing their corporate existences the application of professional risk management principles to the identification measurement and control of personal and corporate loss exposures is vital with the ultimate objective of protecting the assets, earning, persons and liabilities of the bank concerned at minimum cost with maximum potential benefits.
In Nigeria for instance, risk management is relatively new not withstanding the fact that risk management, risk assessment, risk control and risk financing are as old as man is, however, modern risk management provide a new approach to these ancient practices which is gradually and slowly going ground. Through the activities of insurance companies lack of adequate knowledge of risk management has limited it’s application in the banking industry.
In view of the present level of economic and technological in Nigeria bank is poor compared to the developed countries of Europe and this is attributed to lack of education of risk management processes in the country. There is therefore the need to developed risk management consciousness in banking industry. One of the yard stick for measuring the level of economic development is the success recorded in the banking industry, it is therefore imperative that appropriate structure in today banking industry.
Most bank policies have not giving prominence to the subject of risk management as regard the prevention, elimination and minimization of losses.
Finally in the banking industry, the risk manager is not considered important and his role is not well appropriated the overall effect of the above could be detrimental to the banking sector as a whole.
1.3 OBJECTIVES OF THE STUDY
The overwhelming empirical evidence of distress in the financial industry has increased public awareness of existing and emerging problem in the banking industry. It has lead to destructive deposit one some less desirable name in the industry. This has imposed tremendous challenges on the bank to effort necessary control measures to improve their capital base, hence, the objective of this study include:
To investigate into the effectiveness of risk management in the banking industry.
To assess the level of identification of the risks factor in the banking industry
To proffer possible strategies to further heighten the level of risk factor identification in the banking industry.
1.4 RESEARCH QUESTIONS
What is the level of identification of the benefit of risk factor in the banking industry?
Is there risk management department in the banking industry?
To what extent does ineffectiveness of risk?
What is the rate of occurance of banking risks?
How effective is risk management in the banking industry?
What are the step taken towards ensuring adequate provision for risk in the industry with a view to minimizing or eliminating risk exposure have on the total loss made by banks.
1.5 SIGNIFICANCE OF THE STUDY
The focus of the study is the banking industry in Nigeria. One of the legacies the structural adjustment program (SAP) left on its trail is the mostly of bank in the Nigeria financial system.
The phenomenal growth of bank was unitary been as a healthy development in the economy, I was believed to stimulate healthy competition in the money market and encourage even spread of resource in the economy.
However, the proliferation of bank has had carried along with it’s sporadic mortage of bed boys, incompetent and inexperience hands into the banking system with the result of increased risk exposure such as fund risk, market liquidity risk and credit risk, consequently, risk management take the view that is firm exposed to risk in a variety of way and in management it comes, it will not double lead to financial losses, risks is therefore viewed in its wider sense and not limited to only insurable risks, we however, notice that is our society, insurance is the most common from risk management whereas it is only a part of the entire risk management process.
In the absence of appropriate risk management structures, banks are likely to suffer huge financial loss, which may lead to distress in the system and lower the banking habits and the confidence of the people.
1.6 SCOPE OF THE STUDY
This study analysis in general concerned with the effectiveness of risk management in Nigeria commercial banking operation is done in such a way as to enhance effectiveness in the sector.
This study is narrowed down to enable the researcher have a sample that could be effectively studied bearing in mined the cost involved. The study areas cover fair commercial banks as follows:
Bank of Nigeria
United Bank for Africa
Access Bank Internation Plc
1.7 LIMITATION OF THE STUDY
In carry out this study many factors will limit the successful achievement of the main aim of the research.
The major limitation will be that risk management department does not exist in most of them to be interviewed banks, besides, the willingness of most banks top management to respond to the research questionnaire appropriately.
1.8 DEFINITION OF TERMS
Risk: It is an integral part of resources of every business concern. The possibility of something happening in the future.
Uncertainty: Doubtful of something, being uncertain not to be depended on.
Risk management: It deals with the principles employed for the effective management of all the risk facing us. It involves the implementation of risk management policies and strategies to ensure that there is uniformity for all banks.
Risk control: This is an attempt to prevent the risk from occurring by outing some specific strategies that meet the objectives of its risk management.
Risk financing: This involves financing plans with appropriate provision for catastrophes in case of occurrence.
RISK MANAGEMENT IN COMMERCIAL BANK AN APPRAISAL