RISK MANAGEMENT A CRITICAL TOOL IN NIGERIA BANKING INSTITUTION

RISK MANAGEMENT A CRITICAL TOOL IN NIGERIA BANKING INSTITUTION

BACKGROUND TO THE STUDY

The banking industries are susceptible to all forms of risk. It has an ageing long history in the overall operation of all banks. The Nigerian Banking Industry for the past decades has witnessed series of Banking distress and subsequent failures. Banks that had been doing well suddenly announced large losses due to credit exposures  that  turned  sour,  interest  rate  position  taken  or  derivate exposures that may or may not have been assumed to hedge balance sheet risk.

Risk is a commonly used word. The Webster comprehensive dictionary defines it as a chance of encountering harm or loss, hazard, danger or to expose to chance of injury or loss”. Thus something that has potential to cause harm or loss to one or more planned objectives. The 1989 annual report and statement  of  account  of  NDIC  revealed  that  classified  loans  and  advances  or  bad  debts amounted to 9.4 billion which contributed 40.8 percent of total loans and advances and 280 percent of shareholders’ funds” (Hall, 1991:8). It is the development of his nature that has led to the introduction of the CBN prudential guidelines for banks.

Cooker  (1989:115),  observes  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” in fulfilling this:

  It must be easily understood

  It must be permanent

  It must be able to absorb losses

These three features are expected to guide member countries, including Nigeria, in assessing instruments to be used in raising bank capital. The bottom line in the debt capital is a risk instrument for financing bank operations and should be discourage as much as possible. The Basel Committee on banking supervision also introduced the “New Capital Accord” which was implemented in 2007. The New Capital Accord required capital charges to be made for credit, market and operational risks. This is aimed at protecting depositors, consumers, and the general public against losses arising from bank fragilityand failure (Umoh: 2005). Ever since 1988, captains of the Nigerian Banking industry have shown keen interest in improving the  risk  analysis,  measurement  and  management  capacity  of  firms  in  the  banking  sector.

All human and corporate under taking have certain element of risk to avert risk, forward looking in management must show sufficient interest in the management and control of these Operations in the bank and monitor the possible impact these may have on the banking performance.

1.2. STATEMENT OF PROBLEM

The Basel II norms cameasan attempt to reduce the gap in point of viewsbetween conflict practices; Risk management is at the core of lending in the banking industry. Many Nigerian banks had failed in the past due to inadequate risk management exposure. This problem has continued to affect the industry with serious adverse consequences. Banks are generally subject to wide array of risks in the course of their business operations. Nwankwo (1990:15) observes that ‘the  subject  of  risks  today  occupies  a  central  position  in  the  business  decisions  of  bank management  and  it  is  not  surprising  that  every  institution  assessed  an  approached  by customers, investors and the general public to a large extent by the way or manner it presents itself with respect to volume and allocation of risks as well asdecision against them’. Other risks  include  insider  abuse,  poor  corporate  governance,  liquidity  risk,  inadequate  strategic direction,  among  others. These risks have increased, ‘especially in recent times as banks diversify their assets in the changing market. In particular, with the globalization of financial markets  over  the  years,  the  activities  and  operations  of  banks  have  expanded  rapidly including their exposure to risks. therefore the implementations of those resolutions emerged by the banks, this Research work is carried out to investigate into some areas that need more attention, which has not been focused or where there has been work or ideals put forward in the areas. To this end, this work attempts to find out a certain problems that affect the bank and try to suggest solution in areas of pitfalls some of these problems included the followings:

1.3   OBJECTIVES OF THE STUDY

In view of the risks prevalent in the credit risks management in Nigerian banks, the major aim of the study is to assess risk management as a critical tool in the Nigerian banking sector. Other aims of the study include;

1. To identify the risks faced by commercial banks in Nigeria
2. To find out the effects of those risks on the profitability of commercial banks.
3. To find out risk management techniques used to treat risk exposures in banks.
4. To examine the effects of credit risk exposure on growth and profitability of Nigeria commercial banks.
5. To recommend ways of improving commercial banks profitability through adequate risk management techniques.

1.4 RESEARCH QUESTIONS

The study will seek to answer the following questions:

1. What are the risks faced by commercial banks in Nigeria?
2. What are the effects of those risks on the profitability of commercial banks?
3. What is the risk management techniques used to treat risk exposures in banks?
4. What are the effects of credit risk exposure on growth and profitability of Nigeria commercial banks?
5. What are the ways of improving commercial banks profitability through adequate risk management techniques?

1.5 RESEARCH HYPOTHESES

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