CHAPTER ONE
INTRODUCTION
Background of the Study
Risk Management is the identification, assessment and prioritization of risks. It is the effect of uncertainty on objectives, whether positive or negative followed by coordinated and economic of application of resources to monitor and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities (Okeh, 2006).
The survival of every commercial bank depends on its ability to manage its risks and loans or advance portfolio effectively. However in the recent past, commercial banks in Nigeria witnessed rising non-performing credit portfolios and these significantly contributed to the financial distress in the banking sector.
Financial organization need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credit or transaction. This is so because the survival and ability of financial institution to compete depend on their ability to profitably manage credit risk. This is the reason why lending is based on the two fundamental products of banking: money and information. Banks obtain these products from customers themselves by offering customer valuable services. They package money and information about their borrowers together with valuable banking services to create loan agreements and sell the loan agreements back to their customers (Hempel and Simonson, 2007).
As such, risk rating system in financial institution contains both objective and subjective elements. Objective aspect is based on financial statements and application of certain financial ratios that reflect liquidity, leverage and earnings. Despite the requirement that risk be quantified, risk rating systems always have a subjective dimension that attempts to capture intangibles such as the quality of management, the borrower’s status within the industry, and the quality of financial reporting. These subjective items may result in inconsistencies.
It is in this regard that many financial institutions have faced difficulties over the years arising from their inability to effectively manage credit risk. As such the major cause of serious banking problems continue to be directly related to tax credit standard for borrowers and counterparties, poor portfolio risk management, or lack of attention lead to a deterioration in the credit standard of a bank’s counterparties. Hence, the need to investigate the subject matter of this research becomes imperative.
1.2 Statement of the 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 (2000) 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 and 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 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.
Objectives of the Study
The broad objective of this study is to assess the problems and prospect of risk management in Nigerian banks, while the specific objectives are:-
1. To identify the causes of credit risk to commercial banks
- To identify the methods of monitoring bank risks
- To identify the procedure for adequate risk management
Research Questions
The following questions will guide the study;
What are the causes of credit risk to commercial banks?
- What are methods of monitoring bank risk?
- What are procedures for adequate risk management?
1.5 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 and
Finally, the study is of immense benefit to policy makers, investors, financial managers’ lecturers and the general public.
1.6 Scope of the Study
This study covers risk management in Nigerians Banks, using First Bank plc Ikot Ekpene Branch as a case study.
The scope of the study covers only risks that are peculiar to commercial banks.
1.7 Limitations of the Study
A research of this nature is found to have a lot of limitations.
Time factor was a serious problem encountered; the period given for the completion of this research work was too short as the researcher had other academic activities to handle.
Financial constraints can never be ruled out in a situation like this, as the money required for the running around, cost of materials etc. was hard to come by.
Another limitation is that of materials for the secondary data. Even though there are many existing text books and journals of insurance nature which would have been used for this research work, getting them in the library was not easy as many students are equally writing on similar topic which require the same materials.
Some respondents were not willing to give out information for the fear of being quoted.
1.8 Organization of the Study
This research project was organized into five chapters. Chapter one was on the introduction which gives the background of the study, statement of the problem, objectives of the study, research questions, significance of the study, scope of the study, limitations of the study and definition of terms; chapter two covers literature review where various works of other authors were reviewed and also attempt was made to provide answers to the questions set out in chapter one; chapter three dealt with the research design and methodology; it highlights the methodology used in conducting this research project; chapter four dealt with data presentation, analysis and interpretation, chapter five finally gave the summary of findings, conclusion and recommendations based on findings of the study.
