Risk Management In The Financial Institution

INTRODUCTION
1.1 BACK GROUND OF THE STUDY:
Risk management is a practice with processes methods, and tools for managing risks, but in its broadest sense, risk management embraces all efforts taken to minimize the impact of uncertain events in business, companies financial and non-financial institutions etc. It provides a disciplined environment for pro-active decision making to determine which risks are important to deal with and to implement strategies to deal with those risks.
The relationship between the survival of banks and national economic well being is borne our of the central position and crucial roles played by banks in the economy. The importance of the banking sector in any economy derives from its three functions namely, financial intermediation, provisions of an efficient payment system and facilitation of the implementation of monetary policies. Hence, an efficient and effective banking in essential not only for the promotion of efficient intermediation but also for the protection of depositors, maintenance of public confidence in banking institutions and above all attunement of steady economic growth.
The upsurge and the consequences of the rapid expansion on the financial system necessitated the need for greater attention to risk management and supervision of the financial institutions.
In 1990, the central Bank of Nigeria (CBN) introduce two important measures which marked the commencement of the new risk management regulations the first was the redefinition of banks capital adequacy by relating the capital requirements of banks to their risk weighed assets and not just loans and advances. It was essentially an implementation in Nigeria of the recommendation of the bank committee of Bank for International settlement (BIS) on a common international standard measurement of capital adequacy.
This provision following the deregulations as a principal factor in the risk structure of the bank.
The second measure was the climax of the new prudential banking guidelines, for the licensed banks. The prudential guidelines are not traditional monetary policy guidelines; rather they are financial stipulations to assist the banks in improving the assessment of their credit performance.
Generally, risk management involves the management of the mix of assets, liabilities and off-Balance sheet (OBS) contracts of a financial institution so as to control interest rate risks, liquidity risk and thus, optimize earning through stable net interest margins this interest rate is borne out of the regulators /supervisors, and risk manager’s duty to protecting depositors, ensuring monetary stability evolving an efficient and competitive financial system and protecting the customers.
Supervisors will have to maintain closer and regular contact with the institutions under their purview in order to be able to make informed judgments of their condition.
As a first step, the regulatory framework should through the licensing process promote the emergency of responsive corporate governance in financial institutions
The bank mangers and directors should be made aware of the various risks that could threaten the viability or survival of their institutions and to ensure their banks are adequately measuring and managing them efficiently.

1.2 STATEMENT OF THE PROBLEM
This study looked into the following problem.
i To identify the risk management process in banking.
ii To identify the different types of risk associated with banks
iii. To identify the factors considered in evaluating the financial risks.
iv. To identify the assessment method in risk management.
v. To identify the advantages of risk management in the financial institution
vi. To identify the economic rationale for management of the financial risks in the Nigerian financial institutions.

1.3 OBJECTIVE OF THE STUDY
The phenomenon of excessive financial risk taking and the wide spread failures and distress in the banking sector has of recent assumed an intractable dimension. The specific objective of the study aims at
i Finding out the need for risk management in the banking sector of the Nigerian financial institutions.
ii This study highlighted how risk management in banking has helped portfolio risk diversification.
iii The general objective of this study is to determine the extent at which the goals and objective of risk management in banking sectors have been achieved.
Iv To provide information about the operations of financial risk management and it’s contributions to the present and future economic growth and development of the country.

1.4 (A) RESEARCH QUESTIONS/ HYPOTHESIS
TO really evaluate the objective of this study, it became pertinent to ask some relevant questions and they are as follows.
i To what extent has the introduction of risk management effected the credit portfolio of banks?
ii To what exert has risk management improved debt recovery of banks?
iii To what exert has the goals of risk management banking been achieved?
iv Do you think that risk management in banking has had a positive impact on customers services
v. Do you think that risk management in banking improves banks liquidly?

1.4 (B) THE SUGGESTED HYPOTHESIS TO BE TESTED
i Ho: There is no significant relationship between risk management and prudential banking HA: there is a significant relationship between risk management and prudential banking.
ii HO: there is no significant relationship between risk management and credit portfolio banks.
iii HO: there is no significant relationship between risk management and banks liquidity.
Ha: there is a significant relationship between risk management and banks liquidity.

1.5 SIGNIFICANT OF THE STUDY
The importance of risk management to the survived and growth of Nigeria banks cannot be over emphasized, there fore:
i. This project will be of importance to the investing public and depositors, the governing authorities, the Central Bank of Nigeria (CBN) and other participating financial sectors.
ii. This study will be having immersed help to the students who may be interested in knowing more about this subject area.
iii. This will also serve as references to project consultants and risk management, in order for them to prevent any uncertain event in their business.

1.6 SCOPE AND LIMITATION OF THE STUDY
In carrying out this study, a survey of some selected banks in Nigeria was used.
The study covered both old and new generation banks like standard trust Bank PLC, All states trust banks PLC and union Banks of Nigeria PLC all are branches in Enugu state. And also, like every other research work, this study had some constraints which were, time constraints which made it impossible for all the data needed for the study to be collected. Financial constraint was also encountered

1.7 DEFINITION OF TERMS
RISK:
This refers to any situation arising out of organizations activities which can give rise to loss, injury, damage, liability or impediment to growth in social, moral and financial terms

CREDIT RISK:
This refer to the failure of counterpart to perform according to a contractual obligation and it is risk applied not only to loans but to other on and off-balance sheet exposures such as guarantees and acceptance

INTEREST RATE RISK:
This is the exposure of banks financial condition to adverse movements in interest rates.

LQUIDITY RISK:
This arises from the from the inability of a bank to accommodate decreases in liabilities or to find increases in assets.

OPERATIONAL RISK
This is a breakdown in internal controls and corporate governance that can lead to financial losses through error, fraud or failure to perform in a timely Mainer or cause the interest of the bank to be compromised.
CONTAGION RISK:
The could result from defaults in honoring inter banks exposures through the payment system.

REPUTATIONAL RISK:
This arises from operational failures to comply with relevant laws and regulations.

PORTFOLIO RISK:
This in variation of the return from a portfolio of combination of assets making up the portfolio.

BANK FAILURE:
This is a situation when the operational licorice of a bank has been with drawn by the central Bank as a result of insolvency and Managerial weakness of not been able to meet up with the daily banking activities and operational requirements.
BANK DISTRESS
This is a situation when a bank or any financial institution is plagued with severe financial and managerial weakness resulting to inability of the bank to meet up with its obligations to it’s customers and the economy, occasioned by fault or weakness in it’s operation which had rendered it illiquid and insolvent.