ISSUES AND CHALLENGES OF RISK MANAGEMENT TECHNIQUES IN THE BANKING SECTOR

ISSUES AND CHALLENGES OF RISK MANAGEMENT TECHNIQUES IN THE BANKING SECTOR

(A CASE STUDY OF FIRST BANK OF NIGERIA PLC.  LOKOJA BRANCH OFFICE)

ABSTRACT

This research is a study of an evaluation of risk management techniques in the banking sector. It also considers the effectiveness of the risk evaluation and management system of commercial adequate corrective measures. In evaluating those risk management techniques both primary and secondary means of data collection was used, to which simple percentage was also used to deduced the results. In conclusion the researcher work shows that there are proper understanding of risk and implication attached to banking industry which could form as basis for banker’ and policy makers could these it was recommended that proper awareness must exist within the bank on the cost of granting to since banking principles is not static.

CHAPTER ONE

INTRODUCTION

1.1  Background to the study

While financial institutions have faced difficulties over the years for a multitude of reasons. The major cause of serious banking problems continue to be directly related to (credit standard for borrowers), poor portfolio risk management or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standard of a bank.

Credit risk is most simply defined as the potential that a bank borrower will fail to meet its obligations in accordance with agreed term. The effective management of risk is a critical component of a comprehensive approach to risk management and essential to the long term success of any banking organization.

The researcher is interested in this study because by the time this study is completed, it will go a long way to highlight the various risk management techniques that will improve success in banking industries in terms of liquidity and profitability.

For most banks, loan are the largest and most sources of credit risk. However other sources of credit risk exist throughout the activities of bank, including in the banking book and in the trading book, and both on and off the balance sheet. The researcher will go a long way to state those risk banks are increasingly facing in their everyday activities. Such risk, includes, acceptance, interbank transactions, trade financing, foreign exchange and guarantees and the settlement of transaction. Bank managers are required to be proactive in their operation for effective management of all or some of these risk that its inefficient and effective management may be source to success of the activities of the bank.

1.2  Statement of the problem

Since a greater portion of banks income depends on credit or loans and advances. It therefore demand the putting in place a good lending and credit management policy which among other thinks will ensure that its income generating assets are of good quality which will implies bad credit policies, it will not properly analyze risk associated with their loans and advances, it has resulted in what is known as not performing loans which have seriously crowed banks profitability and have in some case lead to the drafted and final collapse of such banks.

1.3  Objectives of the study

The main objectives of the study is to examine the importance of risk management techniques in the banking sector, other objectives which the researcher work aims at achieving area:

i.            Identifying and examining the various risk to which the bank is exposed

ii.           Determining the concentration of risk and check possible abuse

iii.         Establishing the need for a comprehensive risk management process in order to identifying group basis measure assets management and control of the risk inherent in the banks and group basis

iv.         Identifying and measuring derivation from sound management (e.g excessive leverage) and recommendations corrective actions

v.          Establishing the need for maintaining adequate and comprehensive system of internet control in accordance with the risk inherent in the banking activities

1.4  Research hypothesis

According to Ojo (2013), hypothesis is a conjectural preposition an informed intelligent guess about the solution to a problem. Hypothesis is also defined as a concise statement, to be tested, that guides a researcher. Hypothesis is the relationship between two or more variable in the population under certain condition.

i.            Null hypothesis (Ho)

ii.           Alternative hypothesis (Hi)

-     Null hypothesis:  Hypothesis is said to be null if its state no difference or no relationship exist between two or more variables.

-     Alternative hypothesis: This is an hypothesis which described the relationship between or among different variable.

Ho:  Credit facilities rendered by the bank to the customer does not required collateral securities

Hi:   Credit facilities rendered by the bank to the customer requires collateral securities

Ho:  The bank does not organize credit department

Hi:   The bank organize credit department

Ho:  The banks does not have accept security in given out credit facilities

Ho:  The bank does not have credit policy

Hi:   The bank have credit policy.

1.5  Significance of the study

The significance of the study is to review the general method of risk evaluation and management of First bank of Nigeria Plc. it also intend to identify and highlight on area of inefficiency in the overall management at risk and given adequate recommendations on corrective measure. The researcher finding will be of great importance to student of business administration. This study is also therefore important for a number of reasons. Firstly, it serves as useful guide to the Nigeria banking sector. Secondly, it provide adequate knowledge on theoretical model for further study as regard impact of training workers performance. Finally, it provide a basis understanding on issues and challenges of risk management techniques in the Nigeria banking sector.

1.6  Scope of the study

Bank face many risk in the ordinary course of their activities. The study therefore will concentrate on the different types of risk the bank is exposed to and how the management of these risk effects the bank profitability. The period of study will cover 2011-2014.

1.7  Limitations and constraints

The limitations of this write up, is the problems encountered in the course of writing this project, and such limitations and constraints are identify and explain below.

i.            Financial constraints: It has to do with lack of fund, whereby the researcher is unable to move from place to place to another in search for information.

ii.         Inadequate data material: This is a constraints that include unavailability of adequate research took like journals, encyclopedia, newspaper etc.

iii.       Time horizon: The major limitations of this research work is time as a result of high academic schedule

iv.        Poor response: The researcher is faced with problem of poor response due to face that the research primarily depends on the use of questionnaire of the primary sources.

1.8  Definition of key terms

In this types of study, it is essential to guide the definition of the words used in the context of the project to help the understanding of the topic under view. Since certain terms are capable of different interpretation by different authors.

To avoid ambiguities and enhance clear understanding of the project, the terms are defined as follows:

Risk: According to encyclopedia, Oxford advanced learners dictionary, risk can be defined as that which is likely to cause problem or danger at some time in the future. Risk can also be seen as the possibility of bad happening at some time in the future, a situation that could be dangerous or have a bad result. In a nutshell, risk can be described as the way of putting a valuable or important material in a dangerous or unpleasant situation, in which it could be lost or damaged.

Risk management: Can be described as the skill or job of deciding what the risk are in a particular situation and taking action to prevent or reduce them. Risk management can also be defined as the principle or techniques used in order to promote and ensure the effective management procedures of risk. In order words it’s the management procedure designed in order to minimized the adverse effect of measuring the financial consequences of loss occurring.

Finance: Finance can be referred to those resources that are at the disposal of any business enterprise that issued for funding or financing the day to day operation of a business firm in the discharge of normal function

Risk evaluation: Risk evaluation is the extent of depth of risk or a risk and it peril.

Cash flow: According to Okeme (2014), cash flow can be defined as the movement of money into and out of a business as goods are brought into and out of a business as good are brought and sold. It is also the process of having enough to make payment when necessary.

Capital: Capital here means a large amount of money that is invested or is used to start a business enterprise.

Techniques: Techniques here means a special way of doing things in an organization either to minimized cost or achieved the organizational objectives as whole. It also has to do with skill of maintaining both human and material resources in an organization.

Issues: Issues can be defined as an important topic that people are discussing or arguing about. It is also seen as an important key term which any organization (most especially union) plans to raise against for effective and efficiency of the growth of that organization.

Challenges: Challenges here can be defined as a new or difficult task that tests the capacity and reliability of an organization in competitive market goals or aims.

Management: Management can be defined as the act of running and control both human capital and machinery in other to achieve a common objective.