Risk Management In The Financial Institution
(A Case Study Of Some Selected Banks)
Risk management in financial institutions is a comprehensive process aimed at identifying, assessing, and mitigating various types of risks that could impact the institution’s financial stability and reputation. These risks encompass credit risk, market risk, operational risk, liquidity risk, and compliance risk, among others. Financial institutions employ sophisticated risk management frameworks, including risk assessment models, stress testing, and scenario analysis, to proactively identify potential vulnerabilities and develop strategies to address them. Effective risk management practices not only safeguard the institution against potential losses but also contribute to maintaining investor confidence and regulatory compliance, thereby ensuring the institution’s long-term viability in an increasingly complex and dynamic financial landscape.
The aim of this study was to examine the impact of risk management in the banking sector of the Nigeria financial institutions. The study started with an attempt to state the problem that motivated the study, which financial institutions
Risk management was into the banking sector to help recluse the risk of systematic failure and avoid the disruptions caused by the financial crises in banks. The study there for, was done to access critically its impacts on Nigeria financial institution
The method for data collection was by questionnaire, we also made use of primary and secondary data fifty one questionnaires were administered, forty two were property tested with the use of chi –square (x2) statistical tool and the entire three nall hypothesis were rejected. We could conclude there fore, that there is a positive relationship between risk management and the dependent variable, namely prudential banking credit portfolio of banks and banks liquidity.
The feelings indicated that financial institutions eg. Banks now take minimized and calculated financial risks as a result of the impact of risk management
And it also medicated that confidence and stability have been restored in the banking sections as a result of the strict risk management regulations
The following recommendations among others were made that the center bank of Nigeria (CBN) need to ensure regular examination of banks so that problem of systematic financial risk could be detected early before the situations gets out of hands
Banks and other financial institution should as much as possible, employ qualified risk managers and staffs. Banking edacities is the aspect of risk management should be encouraged.
Title page
Approval page
Dedication
Acknowledgement
Abstract
Table of contents
CHAPTER ONE
INTRODUCTION
1. Background of the study
1.1 Of the problem
1.3 Objective of the study
1.4 Research question /hypothesis
1.5 Significance of the study
1.6 Scope and limitations of the study
1.7 Definition of operational terms
References
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 An overview of risk management
2.11 Meaning and purpose of risk management
2.12 Various types of financial institutions
2.2 The concert of risk
2.2.1 Various typed of risk that exist in financial institutions (banring section)
2.2.2 Credit risks
2.2.3. Capital risks
2.2.4 Interest rate risk
2.2.5 Liquidity risk
2.2.6 Operation risk
2.2.7 Contagion risk
2.2.8 Off balance sheet risk
2.2.9 Post folio risk
2.3 Various ways of risk control in financial institution like banks
2.3.1 The duties of a risk manager
2.3.2 The effect of a information technology as an improvement to the performance of the risk manager
2.3.3 Problems faced by the risk manager in managing risks in financial in managing risks in financial institutions like panes
2.3.4 Manageable and non-manageable risk in the financial institutions like banks
2.3.5 Prospects of effective risk management in the financial instillations like banks
2.3.6 Various classes of insurance that is available to the management of the insurance risks.
2.4 Impact of risk management in banking section of the Nigerian financial institutions
2.4.1 Risk management impact on capital risk
2.4.2 Risk management impact on credit and portfolio risks
2.4.3 Risk management impact on off- balance sheet risk
2.4.4 Risk management impact on operational risk
2.5 regulatory /supervisory authority’s role in risk management
2.5.1 Supervisory authorities responsible for banks liquidity management
2.5.2 Supervisory authorities responsible for banks off- balance sheet operations
2.5.3 Supervisory authorities responsible for banks off balance sheet operations references
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 An doer view
3.2 source of data
3.1 Primary sources
3.2.2 Secondary sources
3.3 Population and samples size
3.4 Method of determining the sample size
3.5 Validity of the instruments
3.6 Methods of date presentation and analysis
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 An overview
4.2 Personal dates
4.3 Hypothesis testing
CHAPTER FIVE
Summary of Findings, Conclusions Recommendation
5.1 Summaries of findings
5.2 Conclusions
5.3 Recommendations
5.4 Suggestions for further studies
Bibliography
Appendix i
Appendix ii
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.
SHARE PROJECT MATERIALS ON:
Risk Management In The Financial Institution:
Risk management in financial institutions is a crucial process that involves identifying, assessing, and mitigating various types of risks that could impact the stability, profitability, and reputation of the institution. Financial institutions face a wide range of risks due to the nature of their operations and their role in the global economy. Here are some key aspects of risk management in financial institutions:
- Types of Risks: Financial institutions are exposed to various types of risks, including:
- Credit Risk: The risk that borrowers may default on their loans or credit obligations.
- Market Risk: The risk of losses due to fluctuations in market prices of assets, such as stocks, bonds, and commodities.
- Interest Rate Risk: The risk that changes in interest rates could impact the institution’s profitability and balance sheet.
- Liquidity Risk: The risk of being unable to meet short-term obligations due to a lack of liquid assets.
- Operational Risk: The risk of losses resulting from inadequate or failed internal processes, systems, people, or external events.
- Reputation Risk: The risk of negative public perception due to actions or events that could harm the institution’s reputation.
- Compliance and Regulatory Risk: The risk of not complying with laws, regulations, and industry standards.
- Systemic Risk: The risk that an event affecting one institution could trigger a chain reaction and disrupt the entire financial system.
- Risk Identification and Assessment: Financial institutions need to have robust mechanisms to identify and assess risks. This involves analyzing internal data, market trends, macroeconomic factors, and external events that could impact the institution’s operations.
- Risk Mitigation: After identifying and assessing risks, financial institutions develop strategies to mitigate them. This might involve:
- Diversification: Spreading investments across different assets and sectors to reduce concentration risk.
- Hedging: Using financial derivatives to offset potential losses due to market fluctuations.
- Credit Scoring and Underwriting: Thoroughly assessing the creditworthiness of borrowers before extending loans.
- Risk Transfer: Purchasing insurance or using securitization to transfer some risks to other parties.
- Stress Testing: Simulating extreme scenarios to evaluate the institution’s resilience under adverse conditions.
- Risk Monitoring and Reporting: Continuous monitoring of risks is essential. Financial institutions need to establish effective reporting mechanisms to keep stakeholders informed about the institution’s risk exposure and risk management strategies.
- Regulatory Compliance: Financial institutions operate in a highly regulated environment. They must comply with various laws and regulations designed to ensure stability and protect consumers. Regulatory compliance is a critical aspect of risk management.
- Governance and Culture: A strong risk management culture starts from the top. The institution’s leadership should prioritize risk management, and employees should be educated about their roles in identifying and addressing risks.
- Technological Innovation: Advancements in technology, such as artificial intelligence and machine learning, are being used to enhance risk management by improving data analysis, early detection of anomalies, and automation of certain processes.
Effective risk management is an ongoing process that evolves as the financial landscape changes. Financial institutions must adapt their strategies to new challenges and emerging risks to ensure their stability and success.