THE IMPACT OF RISK MANAGEMENT AND CORPORATE GOVERNANCE ON BANK PERFORMANCE
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THE IMPACT OF RISK MANAGEMENT AND CORPORATE GOVERNANCE ON BANK PERFORMANCE
The performance of Nigerian banks is the main subject of this study’s analysis along with the effects of corporate governance and risk management. Understanding the relationship between risk exposure, risk management, corporate governance, and the operational effectiveness of banks is the main goal of this study.
The following five research questions were created in that order: Do commercial banks develop and put into practise risk management strategies and procedures inside their organisations? Do bank employees get the idea behind the value of risk management techniques in the financial system?
Do bank employees comprehend the connection between risk exposure and corporate governance? Do bank employees comprehend the connection between risk management and corporate governance? Does the effectiveness of a bank’s operations depend in any way on corporate governance and risk management?
In a similar vein, five hypotheses were developed to address the aforementioned study problems. A study of related literature addresses topics including risk exposure and other risk categories in the Nigerian banking industry, including credit default risk, operational risk, reputational risk, human resources risk, and merger and acquisition risk.
The nature of risk management in Nigerian banks and the problem of corporate governance in the Nigerian banking industry are other topics covered in the literature study. The study combines data from three different sources: (i) a structured questionnaire, (ii) a one-on-one interview, and (iii) published materials.
When it is required to employ one technique of data gathering to supplement the shortcomings of another, this strategy offers a research design. The study is exploratory and uses a survey methodology. The effectiveness and health of a bank are strongly correlated with risk management, corporate governance, and these findings.
Findings also show that banks with effective corporate governance processes outperformed banks without them in terms of performance. According to the report, institutions with poor risk management and corporate governance ratings are more vulnerable to risk.
The study comes to the conclusion that risk management and sound corporate governance are beneficial for Nigerian banks’ operating efficiency.
It is advised that Nigerian banks adhere to excellent corporate governance in order to become efficient, effective, responsive, and accountable businesses that improve society by generating sustainable wealth and jobs with honesty, decency, and transparency.
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Banks play a crucial role in the economy of every country because they are the drivers of economic life. Therefore, it should come as no surprise that their operations are arguably the most strictly regulated and overseen of all commercial activities (Soyibo and Adekanye, 1991).
The banking industry’s susceptibility to a variety of hazards is the primary cause of the high level of regulation that characterises this industry (Isu, 1991; Jimoh, 1992).
The Nigerian banking industry and/or system have witnessed significant changes over time. These modifications are a result of issues with the banking industry’s risk management and the system of corporate governance (Sanusi, 2010).
According to Bangudu (2010), the exposure to risk, incapacity to manage risk, and subpar corporate governance structures in the banking system are the main issues facing the Nigerian banking sector.
Determining the relationship between corporate governance, risk exposure, and risk management in the context of the Nigerian banking sector is the aim of this study.
The Central Bank of Nigeria (CBN), based on its findings following the conclusion of a special audit to assess the health of banks operating in Nigeria in 2009, declared that many of the 24 banks were not only lacking in quality leadership,
but also guilty of poor risk management culture and bad corporate governance practises. Similar to this, Philips (2010) notes that despite an N620 billion rescue of the industry in 2009, Nigerian banks are quite risky. Philips contends:
“The Nigerian financial system continues to be quite dangerous. The single ‘B’ category rating that we have for the banks is a relatively low level in comparison to most banks around the world. According to Philips, the Central Bank of Nigeria’s ongoing reform of the banking industry had a long way to go.
“We still consider the Nigerian financial system to be extremely risky. There is still much work to be done in regulatory reform, he stressed. According to Philips, “What Nigerian banks really need is to continue improving their risk management culture, particularly in developing strong asset quality measures” (pp. 12–13).
Blaauw (2009) claims that Nigeria has not yet adopted the 1998 modification to the 1988 Basel 1 agreement on market risk. Since banks engage in proprietary trading, there is no specific regulatory capital requirement for market risk taken.
The capital requirements for stockbrokers are not comparable to the risks they assume in proprietary trading outside of other nations. Other nations’ needs for market risk capital have aided in the growth of derivative markets.
The expansion of derivatives, essential tools for reducing market risk, has also been constrained by Nigeria’s weak market risk management practises.
In general, Nigeria’s market risk management practises are underdeveloped and falling behind those of other emerging markets. The depth of Nigeria’s capital markets must be developed, according to Blaauw (2009), in order for the country to achieve its 2020 goals and continue to build its economy.
Sound market risk management procedures must exist in order to foster the confidence of investors needed for the growth of the capital market.
Therefore, the Basel I and II market risk management rules for implementation by banks and other financial institutions should be adopted as a national priority by regulators of the Nigerian financial system.
Additionally, there is a connection between risk management and corporate governance. Goje (2010) asserts that the Nigerian banking system’s shortcomings in corporate governance procedures during the previous few years may be to blame for the situation in which banks are currently unable to protect themselves against excessive risk-taking.
The CBN stated in April 2006 that the Nigerian banking sector needed a new code of corporate governance because of the banks’ subpar corporate governance practises, which have been cited as one of the primary causes of almost all known instances of corporate collapse of financial institutions in the nation.
According to a Securities and Exchange Commission (SEC) assessment, barely 40% of Nigerian quoted businesses had even the most basic kind of corporate governance in the years before to 2003.
The Central Bank of Nigeria (CBN), among other things, recognised deficiencies in the corporate governance practises of Nigerian banks as inadequate risk management practises leading to a significant amount of non-performing loans, particularly credits tied to insiders.
In a related scenario, Sanusi, who was the Central Bank of Nigeria’s (CBN) governor at the time, remarks in 2010 that effective risk management is a wonderful preventative measure against bank failure since it emphasises sound corporate governance.
Risk management, according to Olajide (2011), includes all of the systems, practises, and guidelines that a company has put in place to recognise and manage the risks that are inherent in its operations.
This student believes that the worldwide economic crisis, and more especially the ongoing problem in the Nigerian banking sector, were caused by the lack of regulation and risk management, the two crucial fundamental aspects in the financial industry.
Consequently, the fundamental principles of risk management are to determine the optimal risk-return trade-off, implement procedures and strategies that will reflect the selected level of risk, and respond appropriately when actual risk levels exceed those anticipated.
Cost management, complexity simplification, risk culture promotion, and disclosure standards are just a few of the things that risk management entails.
1.2 STATEMENT OF THE PROBLEM
It is clear from the discussion above that corporate governance and risk management are essential components in our country’s effort to clean up the banking and monetary system. Nigerian banks need to be able to safely manage their assets if they want to compete in the global economy.
Unfortunately, the majority of analysts who have examined the Nigerian financial sector have proven that managing risk is a challenge that has to be solved if our monetary policies are to accomplish their stated goals.
In this project, we consider risk management to be an important topic that should be explored to determine whether or not our banks are complying to the principles of corporate governance and risk management, and if not, what may be done to fix the issue.
1.3.1 PURPOSE OF THE STUDY
Understanding the fundamentals of corporate governance, risk exposure, and risk management, as well as how they affect the performance of the banking industry, is the study’s overarching goal.
The incapacity of the banks to manage risk exposure and weak corporate governance are two of the main issues the Nigerian banking sector is currently dealing with, as can be seen from the problem statement. As a result, and specifically, the goals of this research are:
(i) To determine whether the banks included for this study have implemented risk-management policies and procedures inside their organisations,
(ii) To find out if the banks chosen for this study are aware of the idea and value of risk management methods in the banking sector.
(iii) To comprehend the connection between risk management and corporate governance.
(iii) To determine whether risk management systems have an effect on the stability and effectiveness of a bank.
(v) To offer advice on how the banking system can adopt and put risk management measures into practise.
1.4 RESEARCH QUESTIONS
The expansion of the Nigerian economy depends on banks’ capacity to implement sound corporate governance systems and control their exposure to risk.
Therefore, it’s crucial to comprehend corporate governance, risk exposure, and risk management tactics in the Nigerian banking sector.
The following research questions were used as a basis for creating the questionnaire for this study and in order to accomplish these goals.
Do commercial banks develop and put into practise risk management strategies and procedures inside their organisations?
Do bank officials comprehend the idea behind the value of risk management techniques within the financial system?
Do bank employees comprehend the connection between risk exposure and corporate governance?
Do bank employees comprehend the connection between risk management and corporate governance?
Does risk management have any effect on a bank’s operational effectiveness?
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