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In summary the aim of conducting this research is to investigate into some problems that are in existence in the banking industry and to suggest possible solution towards adveving crisis free banking, in Nigeria according the cuts which constitute crisis are insxhaustible but prominent among them in forgery and loss of public confidence due to the management attitude. Fowever untrained staff and those bank staff who now occupy position in the bank contribute more of distress which leads to banking crisis
1.1 BACKGROUND OF STUDY
Risk management in banking is theoretically defined as “the logical development and execution of a plan to deal with potential losses”. Usually, the focus of the risk management practices in the banking industry is to manage an institution’s exposure to losses or risk and to protect the value of its assets. In general banking business is regarded as risky business. Economic theory suggests that there are two economic units - surplus unit and deficit unit - and these economic units prefer to use financial institutions (intermediaries) to transfer the necessary funds to each other. Certainly, this process increases the importance of the financial intermediaries in the economy, but also poses some risks to these institutions. Economic units usually prefer to use intermediaries because of the problems associated with asymmetric information. In order to solve the asymmetric information problems, institutions are recruiting skilled employees and systems, that is why the scarce sources of funds are now used more effectively by units in the economy. Therefore, the funds are channelled to the most valuable projects that are beneficial to the economy. However, this process of channelling funds from one unit to another naturally has some inherent risks within the process. Banks are usually managing those risks are part of their normal operations.
The risk management process in banking raises various questions. These issues highlight the importance of having risk management practices in banking. These matters are:
• “What kind of events can damage banking business and how much damage can be done?”
This question highlights the importance of investigating the activities of the banks that are creating risk or losses and also assessing the potential damage that those risks could cause. Therefore, it can be said that the risk management process starts with the identification of the potential losses or risk and continues by assessing or measuring those issues.
• “What kind of actions should be taken by the institutions in order to manage those risks?”
After identifying and analysing the risk, it is necessary to determine what kind of actions/activities can be implemented by the banks to address these potential hazards. Otherwise, if banks do not address the risks, this can lead to significant losses for the institution. Therefore, in order to have a sound and healthy institution, new techniques have been developed in the modern banking industry to manage these losses. There have been many banking crises around the world in previous decades. Now, many countries have implemented risk management practices to deal with these crises
• “Did the institution make the right decision?”
After a decision has been made and implemented by an institution, monitoring and reporting usually take place. This step is the last part of the risk management practices checking and reporting the activities of bank risk management.
The risk management process can be summarised with the following three steps:
1. Identifying and assessing the potential risk in the banking business,
2. Developing and executing an action plan to deal with and manage these activities that incur potential losses,
3. Continuously reviewing and reporting the risk management practices after they have been put into action/operation.
The overall purpose of the risk management process is to evaluate the potential losses for the banks in the future and to take precautions to deal with these potential problems when they occur.
1.2 STATEMENT OF THE PROBLEM
In the light of the vital role which banks should play in developing the rational economy in their capacity as vectors of fund for savings investment and employment opportunities. It will be expendient to point out that Nigerian banking system in all its advancement has not succeeded yet in affectively achieving this mission
The reason is not just one of the facts that some banks have failed but there are other problems associated with them that the researcher seeks to address these problems include:
- The loss of public confidence in the banking industry due to the crisis in the sector (Ekezie 1994).
- The short comings of the regulatory supervisory authorities in banding the crisis (Eh bokphA 1993)
- How the ownership structure of distressed bank contributed to their predicament (Ojir 1998).
There are numerous problems that have arisen and which constitute crisis in the banking industry and this work will attempt to solve them.
1.3 OBJECTIVES OF THE STUDY
Crisis in banking industry is a serious problem which like a public dropped into a pool of a pool of water affects every aspect of the economy.
1. It has led to deposite ran: This affects adversely the liquidity and earning capacity of the banks and consequently resulting to decline in availability of inventible funds in the economy.
2. It has led to increase in rates as depositors ask of higher rates to return for perceived higher changes of bank failure and conseguem risk of financial loss.
3. Crises in the banking industry has led to unemployment which leads to fall in aggregate demand and consequently a reduction in the production level.
4. Banks are central to an efficient and effective payments system in any country with bank failure the payments system would become precarious, as link between the real and financial sector including international settlements, would be greatly impaired this would inhibit the intermediation role of bank and the development of the country (Ojir 1998). This research work will help the management of banks to manage effectively and efficient.
1.4 Research Questions
The organization’s ability to effectively monitor and manage its risk, using the risk management tools, can make the difference between success and failure in today's highly competitive environment. In this regard the study will describe the present state of affair of the Bank since it doesn’t have any control over the variables, which is the extent of application of risk management tools and measurement techniques of the Bank. Therefore, the study attempts to answer the following questions.
● What are the activities performed in the risk management process at the Bank?
● What tools/techniques of risk management are used by the Bank?
● How does the Bank, identify, measure, monitor and control risk?
● What gaps exist between the risk management system of the Bank and the benchmark theories and principles?
1.5 SIGNIFICANT OF THE STUDY
The researcher hopes to achieve a great thing at the end of the study. This project will help many that are interested in the banking it will also help them to do the causes of crisis, how it can be immense benefit to the following people.
1. Scholar in the field of banking and finance:
It will enlighten the students and afford them the opportunity of appreciating the contribution to wards their study.
2. Bank: It is of great benefit to banks when they notice fraud or poor loan management which leads to distress, they will try to prevent it to avoid liquidation.
3. Future Researchers: It will serve as a companion to future researchers who are interested on cause of distress economic implications and possible remedies.
4. Investor: It will help them to know that distress exist in banks by so doing they will be careful not to invest in banks were there is problem of distress.
5. Officials of regulatory agencies: It will help the officials of regulatory agencies to know how to prevent distress from happening.
It will also help to enlighten to public on how distress has cause a lot of problem in our economy.
1.6 SCOPE OF THE STUDY
The scope of the study is to overview the application of risk management practice of the Bank, hence, the key area on risk management process as compare to acceptable standard focusing only on city branches, which consists up to 80% of credit portfolio of the Bank.
1.7 DEFINITION OF TERMS
1. Crisis: Moment of great danger faced by banks.
2. Distressed bank: A bank managerial operational and financial weakness.
3. Management efficiency: Measure of management qualification, competence and achievement.
4. Bank: This is a place in which money is kept and paid out on demand where related activity go on.
5. Regulatory/supervisory Authorities: This is the Central Bank of Nigeria (CBN) and nation deposit insurance co-operation (NDIC).
6 Operators: The management and staff of a bank including the shareholders.
1.8 ORGANIZATION OF THE STUDY
The paper presented on five chapters; the first chapter covers the introduction, background of the study, research question, and objective statement of the problem, significance and scope of the study. The second chapter indicates review of related literature which includes information from books, journals, articles and reports, chapter three describes the resea
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