ABSTRACT

Risk management is the act of mitigating the risk elements in the small and medium scale businesses most of these businesses often go out of operation because of one risk or the other and most of them do not take insurance covers to protect their businesses against risk. Risk is defined as undesirable deviation from what is expected; therefore this research seeks to examine the risk management in these small and medium businesses in Akwa Ibom State. Interviews and questionnaires were used to obtain the primary information. These information were presented and analysed using simple percentage and Pearson Moment Product correlation coefficient. The data presented and analysed revealed that the problems facing small and medium scale are lack of risk management, training, finance and support from government. Based on the above findings, it is recommended that Akwa Ibom Government should give support and make the small and medium scale businesses to take insurance covers against loses emanating from pure risk.

CHAPTER ONE

BACKGROUND OF THE STUDY

1.1    INTRODUCTION

A term with a wide application, it is not easy to give risk a generally accepted definition. People tend to define it according to how they understand it to reflect their peculiar circumstances. To some, risk is that monster that evokes apprehension. To others, it is a disaster. Still, some people see risk as an embodiment of damages/loss of lives and quickly associate it with earthquake. Furthermore, some persons view risk as undesirable deviation from what is expected.

One thing common to the above reflections is that risk leads to losses. Losses as used here mean that the outcome of risk moves its bearer away from his or her normal expectation. Pause a little here and reason. No one cherishes the occurrence of a disaster. People are afraid of accident; fire outbreak and earth tremor. These things are undesirable. They create destruction and bring hardship to people who otherwise hope to have a normal life, full of comfort.

The point we try to explain is that risk creates a variation between what is desired and what actually happens. This point, when fully grasped, moves the reader to the definition or risk as “a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for” (Vaughan and Vaughan, 1996:5). This means “a low probability of expected outcome” (Dwivedi, 2002:416).

In businesses, risk occurs where an eventually takes place and makes the firm to fall below its normal operating income. In life, risk occurs when death strikes and throws the dependents of the decreased into financial turmoil. In the economy, there is risk when, because of inflation, the real value of money declines over time. In politics, we commonly see risk at work when a change in a country’s leadership brings about variations in government policy thrusts that impact negatively on the economy. In culture, intra and inter societal socializations may give rise to sham changes in taste and demands of consumers. Negative changes in taste and demand, no doubt, have debilitating consequences. Domestic goods pile up, may be, because consumers’ interest is channeled abroad resulting in increased importation and deterioration in the country’s balance of payments.

Risk is so pervasive that it is commonly asserted that life itself is risk. This means that life and risk are inalienable. Every person is at the danger of it so long he or she accepts to fend for his or her livelihood. Whether he works in the farm, turns the machines in a factory, or engages in government work, the man is taking in the farm, may have his finger chopped off by a machine in the factory or may encounter accident while on his way to office.

In businesses, every asset is believed to posses inherent risk. Depreciation is one of such risks, but beyond it, theft and unforeseen damages are other risks to which business assets are exposed.

The scope of risk is better pictured from the wide range of insurance cover designed to ameliorate it in the society. You probably saw in chapter 1 that there are basically seven classes of insurance namely: life, marine and aviation, motor vehicle, fire, general accident, oil and gas, bonds credit guarantee and suretyship, engineering and miscellaneous. These are areas of potential risk that people face day in day out. They imply the university or risk and corresponding elastic apprehension that envelopes mankind as people express fears towards (i) death (ii) loss of property (iii) twisting winds in the high seas (iv) accident at home and in offices (v) manslaughter and losses arising from motor accident (vi) fire infernos and (vii) contractual misgivings and breaches.

1.2    RISKS VERSUS UNCERTAINTY

In attempting to draw a line between risk and uncertainty, we review and take reads through our earlier work on the two subjects published in introducing Business: the Nigerian perspective.

It is not at all times those unknown eventualities causes losses. There are some actions that could lead either to a loss or a gain. For instance, the decision to go into business could lead either to a loss or a gain. So could speculative investment in a stock or foreign exchange lead to a monetary gain or monetary loss. But in business, these cases and similar ones are often fused into risk analysis, primarily because they are about the unknown. It is to be noted however that they are not risks in the strict sense of the word. Rather they are uncertainties, uncertainty referring to the state of being unsure about possible outcome (Crowther, 1996).

Uncertainty has to do with an eventuality` which outcome may be a gain or a loss whereas risk is associated with negative outcomes. An eventuality like fire outbreak can only lead to losses. So will occurrences like windstorm and accident? Their impacts are negative rather than positive. They thus illustrate risk and not uncertainty even though there is some uncertainty about their occurrence.

The distinction between risk and uncertainty such as what we have done is important from the point of view of insurance. In insurance, it is only risk which is covered; uncertainty is not. The point is that the eventuality insured against has to be the one which occurrence results in a loss and not the other way round. There is no point guarding against a case which could bring a gain to the policy holder who may not be kind enough to reveal the true position of the case because of his interest to enrich himself by benefiting from two fronts.

All classes of insurance enumerated earlier are of “loss nomenclature”. None of them has a tendency of bringing about a gain at a time it strikes. Insurance, by distinguishing between risk and uncertainty and giving prominence to the former, takes speculation away from its scope of operation. But a sham distinction between risk and uncertainty has not failed to draw some resentments. Vaughan and Vaughan (1996) are at pains justifying such distinction. To them, there is no justification fro the enormous attention directed at the differences between two concepts that are as twin as they are confounding. They define uncertainty as “a state of the mind characterized by doubt, based on a lack of knowledge about what will or will not happen in the future” (p.5). This definition is similar to their description of risk which we considered not long age. In this other definition they do not mention the issue of loss but criticize the undue theorizing that has been devoted to the treatment of risk as if it is miles away from uncertainty. To Owivedi (2002:41) where there is risk, there is uncertainty”.

1.3    PURE INSURABLE RISKS

Although we have made the point that insurance covers risk and not uncertainty, it is not all types of risk that are so covered. The ones considered are those whose probabilities can be computed. They are called pure risks and the ones said to be insurable. They include eventualities like fire, theft and accident. Losses arising from them, you will agree, are such that could be assessed and valued in real terms. They are specifiable, accidental (unexpected) in nature, definite and significantly important to the victim (Eke, 2002).

1.4    UNINSURABLE RISKS

Other risks like investment risk, potential government actions 1(political risk) and general economic conditions (economic risk) are nonspecific and complicated, meaning that their probabilities are inestimable (Dwivedi, 2002).

The uninsurable risks, having lost out in the scheme of insurance, draw management support from various techniques developed by economic and financial theorists. Some of these techniques are seen in capital budgeting and portfolio management.

Capital budgeting involves the commitment of long-term capital to a project based on the understanding that the project will generate income to cover its cost and guarantee some profit-the reward for the entrepreneur. Because of inherent business and economic risks, capital budgeting is best approached using some techniques which address possible deviations from expected returns. These techniques include certainty equivalent, risk-adjusted discount rate, probability and simulation.

Portfolio management, on the other hand, has to do with the choice of desirable securities for investment. The chosen financial assets from what is known as portfolio. Its management seeks to ensure that the investor reaps maximum returns from the securities. This is believed to be possible if the securities are perfectly negatively correlated in returns. What’ this implies is that when some securities in the basket (portfolio) experience falling returns, others will be recording rising returns. At no time will the investor experience simultaneous fall in returns of all the securities chosen for investment.

To achieve this, the investor is advised to diversify his security selection bearing in mind the existence of two types, of security risk-the diversifiable (unsystematic) risk and the undiversifiable (systematic) risk. The diversifiable risk is the risk that emanates from the company that issues a security. Therefore, if the investor wants to avoid it, he avoids the company’s security. In other words, this type of risk can be diversified away

The undiversifiable risk is generated by the ups and downs of the stock market and thus affects every security in the market. Because of this, there is nothing the investor can do because all securities are affected by the risk. In this circumstance, emphasis in portfolio management is placed on diversifiable risk.

1.5    RISK IDENTIFICATION AND RISK VICTIMS

The mere fact that several categories of risk have been cited in the literature is indication that unforeseen eventualities have for long been identified. The issue therefore is not whether risk exists. The problem is whether their victims ever recognize that it does exist and that it is capable of striking when they least expect. The victims of risk are themselves of classes, namely: risk avoiders, risk lovers and risk neutral.

(a)  Risk Avoiders: These are those people who run away from risk. They are pessimistic in their dealings with risk, always believing that the worst will happen. They are ever conscious of risk and will take steps to avoid it. Their risk-return trade - off is illustrated in figure 2.1.

Opportunities carrying large returns but low risk are pursued by the risk avoiders.

(b) Risk Lovers: Risk lovers are optimists who date to face risk. To them the mare risky an opportunity, the more its return. This behavior is said to be exhibited by investors in common shares who are not worded that they bear the risk of having to wait for their firm’s creditors to be settled before they receive their benefits which in some cases may not come at all. But when they come, they often outclass what is paid to the creditors whose interest is fixed and is for a limited time. The common shareholders’ interest is perpetual. The

risk tolerant behavior of this class of people is shown in figure 2.2.

Fig 2.2: risk-return trade —off of the risk lover

The backward bending curve shows that the man is truly a risk lover

who cherishes to pursue those opportunities that carry higher risk.

(c) Risk neutral: This category represents people who are indifferent towards risk. The amount of risk assumed is behaved to be proportioned to the level of return earned. See figure 2.3 for their risk-return trade off.

Fig 2.3: risk-return trade-off of the risk neutral

Of these three categories, it is the risk avoiders and the risk lovers who show concern for risk and therefore will, at once, identify it. Between them, however, the risk avoiders assume a commanding height. They are defensive and therefore do not hide their dislike for risk. They are always watchful and alerts to detect what risk strikes, when and how much the damage is likely to be. What this means is that risk averters normally d risky situations and opportunities irrespective of the gains promised.

The risk neutral shows less concern for risk so much that the issue of risk identification bothers him little. Readers at this point are encouraged to assess themselves in relation to these three risk behavioural patterns. Which of them do you think you belong indifferent to? Pick a sheet of paper and a pen, then sketch your risk behavior. In this paper, state what you understand by risk identification. Compare your points with what the book records below.

 1.6   RISK IDENTIFICATION DEFINED AND ILLUSTRATED

From the discussions do far, we can say that risk identification is the act of’ recognizing the presence and emergence of risk. Some risks do riot) strike without a warning. Fire, for instance, results in most cases from carelessness that leaves sources of fire undisconnected. Stove, gas cooker, electricity points or fuel tanks may not be switched off or well dosed, thus opening up an opportunity for fire to strike. Death, a major and common risk is a phenomenon that is sure to happen and therefore demands that every person recognizes himself or herself as a potential victim. Natural disasters are often preceded by some early warning signals. For example, earthquake may be preceded by some rumbles in the earth crust or by possible volcanic eruption.

Because risk varies with individuals and institutions and its impacts are debilitating, devices have been developed to complement human intelligence to detect when it shows striking signs. Households are known to mount security devices (like alarm system) that notify of theft and circuit breaker that repudiates possible electricity-induced fire outbreak and damages. The same devices are used by companies and public Institutions. In addition, mechanical devices that detect risk threat are employed at the gates of a number of organizations. Linked mainly to death threat, security guards work tirelessly to identify and dislodge dangerous weapons like knives, guns, bombs, etc. before any damage is done.

Natural disasters like windstorm and earthquake are often detected days before they strike and members of the public are usually advised to move out of the threat zones. In what is called early warning signal, the risks are identify and precautionary measures are taken to reduce damages.

1.7    RISK MEASUREMENT

Measuring risk is perhaps the most difficult aspect of risk analysis and management. This is because what is measured is primarily historical but in the converse it is to be given current price tag. A house built years ago when the costs of building materials were cheap and now destroyed by fire is to be valued based on current estimates for the purpose of compensation. So also are personal effects destroyed in the inferno. What price is arrived at becomes a matter of guess drafting by the valuers. But this price has to be a fair representation of the victims loss or losses, At the same time, it has to be acceptable to the insurer. You then see that the process or arriving at a mutual figure is not an easy one.

A team from the insurance company Will have to be there to have first hand assessment. Backed by professional’ estate valuers, it conducts its own assessment. Independent valuers called loss adjusters intervene to reconcile what is submitted by the risk victim with the position of the insurer and nip possible agitations between the two parties in the bud. This however may not eliminate some foot dragging particularly on the part of the insurance company. Risk measurement obviously is complicated resulting in the colouring of insurance as embattled business. You are now aware that risk measurement is about costing the losses and not necessarily estimating the physical, boundary of the risk in question. But there are times the term is used to mean the latter.

Disaster that effect large areas are often assessed by government officials who take tours of the affected communities for on-the-spot assessment. Fire outbreak, flood, windstorm, motor accidents of enorm

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