RISK MANAGEMENT A CRITICAL TOOL IN NIGERIA BANKING INSTITUTION
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RISK MANAGEMENT A CRITICAL TOOL IN NIGERIA BANKING INSTITUTION
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
The banking industry is vulnerable to all types of risk. It has a lengthy and illustrious history in the overall operation of all banks. For decades, the Nigerian banking industry has been plagued by bank crises and subsequent failures.
Banks that had been performing well unexpectedly announced substantial losses due to sour credit exposures, interest rate positions made, or derivate exposures that may or may not have been assumed to manage balancesheet risk.
The term “risk” is frequently used. Webster’s comprehensive dictionary defines it as “the possibility of suffering harm or loss, hazard, danger, or exposure to the possibility of suffering injury or loss.” Something that has the potential to hurt or lose one or more planned objectives.
According to the NDIC’s 1989 annual report and statement of account, “classified loans and advances or bad debts amounted to 9.4 billion, accounting for 40.8 percent of total loans and advances and 280 percent of shareholders’ funds” (Hall, 1991:8). The evolution of his nature has resulted in the adoption of CBN prudential standards for banks.
Cooker (1989:115) comments that “the main function of a bank is the collection of deposits from those with surplus cash resources and the lending of these cash resources to those with an immediate need for them”
It must be simple to understand.
It must be long-term.
It must be capable of absorbing losses.
These three characteristics are meant to guide member countries, including Nigeria, in evaluating instruments for increasing bank capital. The bottom line in debt capital is a risk instrument for funding bank operations and should be avoided to the greatest extent practicable.
The Basel Committee on Banking Supervision also proposed and enacted the “New Capital Accord” in 2007. Capital costs for credit, market, and operational risks were mandated by the New Capital Accord. This is intended to protect depositors, consumers, and the general public from damages caused by bank fragility and failure (Umoh: 2005).
Since 1988, Nigerian banking industry leaders have been keenly interested in enhancing the risk analysis, assessment, and management capabilities of banking organisations.
To avoid risk, forward-thinking management must demonstrate adequate interest in the management and control of these operations in the bank, as well as monitor the potential impact they may have on the bank’s performance.
1.2. STATEMENT OF THE PROBLEM
The Basel II criteria were developed in an attempt to bridge the gap between conflicting practises; risk management is at the heart of lending in the banking industry. Many Nigerian banks have failed in the past owing to poor risk management.
This issue has persisted, with major ramifications for the sector. Banks face a wide range of hazards in the course of their business activities.
According to Nwankwo (1990:15), “the subject of risks today occupies a central position in the business decisions of bank management, and it is not surprising that every institution is assessed and approached to a large extent by customers, investors, and the general public by the way or manner it presents itself with respect to volume and allocation of risks, as well as decision against them.
” Other hazards include insider trading, weak corporate governance, liquidity risk, and insufficient strategic direction, to name a few. These risks have grown in recent years, as banks diversify their assets in a changing economy.
With the globalisation of financial markets, banks’ activities and operations, as well as their risk exposure, have expanded quickly throughout the years. As a result, the banks’ implementations of those resolutions emerged. Research is carried out to explore some topics that require greater attention,
which have not been concentrated on, or where work or ideals have been put forward in the fields. To that purpose, this paper attempts to identify specific difficulties affecting the bank and suggests solutions in areas of potential dangers. Among these issues were the following:
1.3 OBJECTIVES OF THE STUDY
Given the hazards associated with credit risk management in Nigerian banks, the study’s primary goal is to evaluate risk management as a crucial instrument in the Nigerian banking sector. Other objectives of the research include:
Identifying the risks that Nigerian commercial banks face
To determine the impact of these risks on commercial bank profitability.
To learn about risk management approaches used in banks to treat risk exposures.
To investigate the implications of credit risk exposure on Nigerian commercial banks’ growth and profitability.
To make recommendations on how to improve commercial bank profitability using appropriate risk management approaches.
1.4 RESEARCH QUESTIONS
The research will attempt to answer the following questions:
What are the dangers that Nigerian commercial banks face?
What impact do these risks have on commercial bank profitability?
What risk management approaches are utilised in banks to treat risk exposures?
What are the consequences of credit risk exposure for Nigerian commercial banks’ growth and profitability?
What are the methods for increasing commercial bank profitability through proper risk management techniques?
1.5 RESEARCH HYPOTHESES
The following alternative and null hypotheses will be developed in order to support or refute the hypothesis of “risk management in Nigerian commercial banks.”
H0: Asset quality has no significant positive impact on commercial bank profitability in Nigeria.
H1: Asset quality has a considerable beneficial impact on commercial bank profitability in Nigeria.
H0: Credit risk exposures have no significant beneficial influence on commercial bank profitability in Nigeria.
H1: Credit risk exposures have a considerable beneficial influence on commercial bank profitability in Nigeria.
1.6 THE SIGNIFICANCE OF THE STUDY
As a result of the enormous challenges confronting Nigerian banking institutions in managing their credit portfolios in order to ensure minimal loan loss through the maintenance of high quality risk assets while optimising returns, this study focuses on the potential financial loss resulting from customers failing to fully honour the terms of a loan.
The report will also look at the role of regulatory bodies in improving banks’ overall risk management by checking compliance with credit policies in the system.
This research, on the other hand, will assist the bank in developing an effective risk management programme with monitoring from the board and top management. Risk management necessitates a top-down approach.
The quality of bank management, particularly the risk management process, is critical to ensuring the banking system’s safety and stability. The goal of this research is to encourage operators and regulatory authorities alike to strictly comply to the laws and standards.
1.7 SCOPE AND LIMITATIONSOF THE STUDY
This study will examine the credit risk inherent in the Nigerian banking system. This is motivated by the necessity for an efficient and effective risk management programme in order to stop the tide of distress in the Nigerian banking industry.
To develop an understanding and knowledge of the Nigerian banking business, data from both qualitative and quantitative sources will be utilised.
A structured questionnaire and interviews, on the other hand, will be utilised to gather pertinent information on topics that require more clarification.
LIMITATIONS
Financial constraint: Inadequate funding tends to restrict the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data collection process (internet, questionnaire, and interview).
Time constraint: The researcher will conduct this investigation alongside other academic activities. As a result, the amount of time spent on research will be reduced.
1.8 OPERATIONAL DEFINITION OF TERMS
The purpose of this section of the study is to define some of the concepts used in the work:
Credit is the transfer of money or other property with the promise of repayment, usually at a future period.
Risk is defined as the uncertainty of future outcomes or the chance of loss.
Portfolio management is the process of making and carrying out an investment decision in securities.
Portfolio – Portfolio is defined as “the combination or collection of various securities on behalf of an investor.”
Hedging is defined as a strategy used to smooth out unpredictability in financial variables in order to aid planning and minimise humiliation caused by cash shortages.
Risk assets are essentially loans or facilities offered to clients.
Credit Analysis: A systematic analysis or inquiry that can improve the lending decision.
Performing Credit: These are facilities that require both principal and interest repayments to be made on time.
Non-Performing Credit: These are facilities that are not serviced in accordance with the agreement’s conditions.
Doubtful Credit: A condition in which the principle and/or interest have been outstanding for more than 180 days but less than 360 days.
Lost Credit: Credit facilities that have unpaid principal and/or interest for 360 days or longer and are not secured by realisable collateral.
Substandard Credit: Those who have unpaid principal and/or interest for more than 90 days but less than 180 days.
Profitability Ratio: This ratio assesses a company’s capacity to achieve a reasonable return on its investment.
Efficiency Ratio: A measure of a bank’s efficiency.
The liquidity ratio assesses a company’s capacity to satisfy its short-term financial obligations at maturity.
Debt Management: This includes all actions related to raising funds from depositors and other creditors, as well as identifying the proper mix of funds for a certain bank.
Asset management is the process of allocating cash among various investment options.
Forward contracts are agreements between a bank and a customer to buy or sell a predetermined amount of foreign currency at a future date.
Tenor Mismatch:Involves matching the tenor of an investment with the tenor of the borrowed money, so invested, or a mismatch is said to occur when the tenor of all investments exceeds the contractual tenor of the borrowed funds.
Currency swap: A simultaneous borrowing and lending process in which two parties exchange a particular quantity of two currencies at the start at the agreed rate.
Prudential rules: The CBN issued the rules on November 7, 1990, as an offshoot of Statement of Accounting Standard No. 10 for banks and other financial organisations. All banks were required to properly follow the criteria for reviewing and reporting performance.
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