EXAMINATION OF RISK MANAGEMENT IN THE BANKING INDUSTRY

EXAMINATION OF RISK MANAGEMENT IN THE BANKING INDUSTRY

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CHAPTER ONE

INTRODUCTION

1.1         Background to the Study

The banking industry as a financial institution is indispensable machinery and plays a paramount role in the process of economic growth and development. This acknowledgement is reinforced by contemporary conceptualization of mobilizing resources from surplus units and channeling some of it to deficit units. The growing dynamic of business environment therefore has created ambivalences necessitating control and coordination most especially in the financial institutions. This ambivalence has parallel movement with risk organization today conduct business under the condition of uncertainty, thus the analysis of this uncertainty entail processes to measure the degree of risk involved. To this end, it would be impossible to understand fully the centre point of this study without looking at the meaning of risk and examination of risk management.

Risk is defined as the chance of having a loss due to occurrence of an event. The risk is always associated with the loss aspects since the world itself has the association of danger of loss. The definition can be ''probability of the occurrence of an event resulting in loss/gain (Rajaram et al 2009).

Similarly, according to Dickson and Stein (1999) risk is the likehood that the hazard will indeed cause the peril to operate and cause the loss. However in order to operate and appreciate the need for loss prevention and implementation measures to achieve same, the efforts are not only aimed to prevent a loss happening, but also to make it

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manageable if it happens. This task is to be achieved in all activities of the organization be in it production, storage, handling, transportation and distribution. The basic process of risk planning risk control and risk financing is integrated into a process known as examination of risk management.

Rejda (2005) is of the view that examination of risk management is a process that identified loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures. Examination of risk management ensures that organization identified and understands the risk to which it is exposed. Examination of risk management also guaranties that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs.

Examination of risk management which is the subject matter of this study is concerned with planning and controlling of activities and resources in order to minimize the impact of unforeseen accident. And examination of risk management plan includes strategies and techniques for recognizing and confronting this threat. Good examination of risk management does not need to be expensive or time consuming; it may be as uncomplicated as answering question such as; what can go wrong? What will we do to prevent the harm from occurring or in response to the harm loss? If something happen, how will we pay it?

Examination of risk management therefore, has to do with the effect of uncertainty on objectives, (whether positive or negative) followed by coordinated and economical application of resources to minimizes, monitor and control the probability and impact of unfortunate events or do maximize the realization of opportunities. Risk can come

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from uncertainty in financial market, project failures, legal liabilities, credit risk, accident and disasters as well as deliberate attacks from an adversary (Rajaram et al 2009).

Thus in perfecting organizational policies, examination of risk management must be well considered in the system for its efficient survival. Many large companies today have employed a full time manager, an executive whose main job is to identify the various forms of risk facing the firm and determine the best ways to handle them, for example, personal injury, fire damage, helicopter crash, theft of properties, loss of profit in fulfillment of obligation, change interest rates, efficiency fraud etc. Many empirical literatures showed several attempt at explaining and measuring risk-taking behaviors in banks to incentives creates by safety-net program such as the fixed-rate deposit insurance system which though arguably, engenders cross-subsidization by creating avenues to take on risk inefficiency; the so-called moral hazard problem. The moral hazard view of risk taking in banks assumes that shareholders make the lending and investment decisions and therefore take a risk to maximize the value of insurance if they so desire (Owojon et al 2011).

According to the Soludo (2004), it is now time to set up a structure that creates a strong base relative to the kind of economy we are operating where banks become channels to do proper intermediation (The Obasanjo Economic Reforms On The Banking Sector, 2005).

The banking business by its nature is a high risk environment. It is the only business where the proportion of borrowed funds is far higher than the owners’ equity. A high

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level of financial leverage is usually associated with high risk. This can easily be seen in a situation where adverse rumors, whether founded or precipitated financial panic and by extension a run on a bank. According to Umoh (2002) and Frequson (2003) few banks are able to withstand a persistent run, even in the presence of a good lender of last resort. As depositors take out their funds, the bank is forced eventually to close its doors. Thus, the risks faced by banks are endogenous, associated with the nature of banking business itself, whilst others are exogenous to the banking system. The risk that arise in the course of business which bankers should be able to control include, amongst others, credit risk, liquidity risk, reputation risk, leadership risk and information technology risk. On the other hand, the risk that are exogenous to the banking system which trend to pose the greatest control problem to bankers include regulatory risk, industry risk, government policies risk, sovereign risk and market risk. Other important ones, as added by Umoh (2002), include competition risk human resources risk and fraud risk.

1.2         Statement of the Research Problem

There is no system that is totally perfect or immune to the effect of the present possibility for banks to diversify into broader range of service and products make life really cool for banking entrepreneurs and managers. But this diversification advantage is a once in a lifetime opportunity that should be consumed with some caution and prudent as this involved a great deal of risk. This is in direct line with the saving that'' the higher you go, the colder life becomes; Banks use these deposits to generate credit for their borrowers, which in fact is a revenue generating activity for most banks.

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This credit creation process exposes the banks to high default risk which might led to financial distress including bankruptcy. This study looks at problems arising from fraud, forgeries, project, investment portfolios and misadministration. The question here is how responsive are banks, in the examination of management and control risk? Other questions below need answer in the quest to examine examination of risk management in banks.

1.   What are the types of risks faced in the banking industry?

2.    What is the efficacy of techniques used by banks to curb the volatile tendency of their environment?

3.   What is the human capacity needed to respond professionally to risk situation in the banks?

4.   How banks evaluate and control examination in risk situation?

1.3         Objectives of the Study

i.         To identify the types of risk associated or related to banks in Nigeria.

ii.         


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