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THE IMPACT OF RISK MANAGEMENT ON PROFITABILITY OF BANKS
THE
IMPACT OF RISK MANAGEMENT ON PROFITABILITY OF BANKS
CHAPTER ONE
INTRODUCTION
1.1 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 profitability and manage
credit risk. This is the reasons 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 are based on financial
statements and application of certain financial ratio 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
continues 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
Commercial banks in the recent past witness rising
non-performing credit portfolios sequel to the inability of their management to
effectively manage risk and credit administration. That problem resulted to
high bad debts in commercial bank and a number of other commercial banks were
classified as distressed banks by the monetary authorities.
Consequently, the need to examine the subject matter: An
Assessment of risk management and credit administration in Union Bank Plc,
Kaduna Main branch becomes worthy of investigation.
1.3 Research
questions
In order to actualize the objectives of this research, the
following research questions was formulated to guild this study:
1) What
are the Methods of Risk Management in GT Bank Plc?
2) How
is Credit administered in GT Bank Plc?
3) What
are the constraints of Risk Management and Credit Administration in GT Bank
Plc?
1.4 Objectives of
the Study
The central objective of the study is to assess the impact of
risk management on the profitability of GT Bank Plc, Murtala Mohammed Square
Branch, Kaduna. The specific objectives are:
1. To find out
the method of risk management used in GT Bank Plc.
2. To identify to
how credit is administered in GT Bank Plc.
3. To identify
the constraints militating against risk management and credit administration in GT Bank Plc.
1.5 Statement of
Hypothesis
1. H0: Effective credit risk management is not
a strong determinants of banks
profitability
H1:Effective
credit risk management is a strong determinants of banks profitability
2. H0 Poor credit
risk management does not lead to bank distress.
H1 poor
credit risk management lead to bank distress.
3. H0 risk
management does not enhances the performance of banks in terms of profitability.
H01 risk
management enhances the performance of banks in terms of profitability.
1.4 Significance of
the Study
This study will be beneficial to financial institution
especially GT Bank Plc, as they utilize the finding of this study as a basis
for policy formulation regarding risk management and credit administration in
Banks. The shareholders, stakeholders and the entire society will benefit from
this study.
1.6 Scope of the
Study
To this end, the study will examine which is the best way to
manage risk in GT Bank Plc, Murtala Mohammed Square branch, Kaduna. The branch
manager, other staff and customers of the branch are to be questioned in the
course of the study
1.7 Definition of
Terms
1. Credit Risk:
This refers to delinquency and default by borrowers i.e. failure to make
payment as at when due.
2. Pure Risk:
This refers to reduction in business value as a result of damage to business property
by theft, robbery, fire, flood or the prospect of premature death of employee
due to work-related illness or accident.
3. Price Risk:
This refers to variability in cash flows due to change in input and output
prices.
4. Credit Administration:
This is the system used in managing the exposure of financial institution to
loan delinquency and default.
5. Business Risk:
This refers to variability in cash flow.
6. Loan
Appraisal: This is the process of determining in advance the various lending
parameters and determining the overall loan limit for each borrower based on
his debt capacity, loan duration.
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