RISK MANAGEMENT IN NIGERIAN BANKS (A CASE STUDY OF FIRST BANK CALABAR, CROSS RIVER STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The effective management of business organizations and the occasional disasters associated with life itself, together with political and social disruptions, are examples of the risks which a society is exposed to. It is not often possible to totally eliminate these risks, but the probability of a loss can be reduced by changing some of the circumstances relating to loss. Applying this to the financial institutions, it has become more important than ever for banks to manage effectively the various types of risk they confront, including market, credit, liquidity, operations and computer system risks. These changing circumstances often create new set of risk in whose answers lie in better planning and well organized risk management techniques. According to Pandey (2013), the key to effective risk management is not to do away totally with the various inherent risks. For example, lending operations of banks have the inherent risks of possible loan losses (credit risk) but by taking the risk, banks are able to charge a premium for their risk taking activities and earn profits. Risks are therefore, a source of profits to the bankers. However, risk management in the Nigeria financial system has not yielded much result as desired due to challenges ranging from insider loans and advances to inadequate risk management policy put in place by the banking operators. It has become a common phenomenon in Nigerian banks to extend loans and advances to family relations, friends and directors without due process. This has led to bad debts caused by inadequate recovery procedures leading to inability of these banks to collect loans and advances extended to these categories of stakeholders ultimately leading to banking distress. Another problem is operational risks. These are the risks of direct and indirect loss resulting from inadequate or failed internal processes, people and systems or external threats. The manifestation of high operational risk in Nigerian banks is the volume of fraud and forgeries. Furthermore, Ogunleye (2009) observed that ignorance and neglect of regulatory guidelines meant to mitigate these risks by bank management contribute to risk. Some of the management teams in the Nigerian banks are either ignorant of risks inherent in banking operations or have total neglect for regulatory guidelines that insulate the banking operations from potential losses. Therefore, based on the foregoing, this study is out to give an insight on how effectively risk management can be put in place in Nigeria banking industry and how various risks associated with Nigeria banks’ performances can be reduced in order to guide against the perennial distress syndrome plaguing Nigerian banks.

1.2 STATEMENT OF PROBLEM

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 is 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 as decision 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 diversity 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.

1.3. AIMS OF THE STUDY

The major purpose of this study is to examine risk management in Nigerian Banks. Other general objectives of the study are:

1. To examine the how banking industry in Nigeria has been faring in management, managing risk in the bank.

2. To examine how asset quality can be efficiently and effectively monitored.

3. To examine the effect of risk management on banks’ deposit and lending.

4. To examine the effects of credit risk exposure on growth and profitability of Nigeria commercial banks.

5. To examine the relationship between risk management and financial performance of Nigerian banks.

6. To examine the policy measures put down on how to tackle the effect of credit risk in order to enhance the quality of banks’ risk assets.

1.4 RESEARCH QUESTIONS

1. How are banking industries in Nigeria faring in management, managing risk in the bank?

2. How can asset quality be efficiently and effectively monitored?

3. What are the effect of risk management on banks’ deposit and lending?

4. What are the effects of credit risk exposure on growth and profitability of Nigeria commercial banks?

5. What is the relationship between risk management and financial performance of Nigerian banks?

6. What are the policies put down on how to tackle the effect of credit risk in order to enhance the quality of banks’ risk assets?

1.5 RESEARCH HYPOTHESES

H01: There is no effect of risk management on banks’ deposit and lending.

H02: There is no significant relationship between risk management and financial performance of Nigerian banks.

1.6. SIGNIFICANCE OF THE STUDY

This study has a number of significant dimensions. The result of this study should provide information to the commercial banks risk management department on the progress so far made in identifying and evaluating risks as to enhance growth and profitability of the financial institutions. The result of this study should also reveal how much such progress has impacted on the growth of the entire commercial banks in Nigeria. Essentially, this work is a step in a right direction to assist and enlighten the general public on what risk management in commercial banks is all about and hence guide them in their immediate decision of handling risks. Furthermore, there is need to provide a reference document for further researchers and evaluation of risk management conducted by other Nigerians/other Nations. This research work will go a long way to increase the availability of literature in the field of risk management in the banks and other related business associates that involve risk in the day-to-day running of the businesses. Finally, the study is of immense benefit to policy makers, investors, financial manager’s lecturers and the general public.

1.7    SCOPE OF THE STUDY 

The study is based on the study on risk management in Nigerian banks, case study of first bank, Calabar, Cross River State.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Risk: Risk of an asset is the potential change of future returns due to its assets (Weston & et al, 2008). Investors always face the risk that their rates of return asset June be lower than value of expected. So the "risk" is likely to be different the real rate of return with investor's desired rate. The risk of a financial asset is a function of one or more factors that cause changes securities prices in market.

Management: - This is defined as the process of directing, co-ordination and influencing the operations of an organization so as to obtain desired result and enhance a total performance.

Commercial Banks- These are financial institutions, which accept deposit and other loans to the customers.

Credit:- A transaction between two parties in which one (creditor or lender) supplier money, goods, securities in returns for a promised future, payment by the other of debtor borrower. To sell or lend in the basis of future payment.

Money:- This can be defined as anything which passes freely from hand to hand and is generally acceptable in settlement of debt.

Hedging: According to (Ebhalaghe, 2010 : 161) defined hedging as a system employed to smoothen out unpredictable fluctuations in financial variables so as to aid planning and avoid embarrassment induced by cash shortfalls.