RISK MANAGEMENT A CRITICAL TOOL IN BANKING

CHAPTER ONE

1.1  Background To The Study

The issue of risks constitute the  great challenges confronting banking operations .The bank is characterized by different kinds of risk which if not properly managed could lead the bank to great loses. The banking sector in Nigeria has over a long period suffered from loses attributed to the inability to effectively manage its risk portfolio. According to Webster comprehensive dictionary risk is defined as the possibility of incurring loss, harm, danger. Risks are those factors with the potential to cause harm or loss to one or more planned objectives. NDIC  annual report and statement  of  account  in 1981   classified  loans  and  advances  or  bad  debts amounted to 9.4 billion which  constitute as one of the reason  for the CBN introduction of the prudential policy for banks.

According to Cooker  (1989:115), The bank intermediation role is to collect deposit from the surplus unit of the public and lend to the deficit unit of the public. Consequently bank management has consistently shown interest in the management of risk with the aim of improving the  risk  analysis,  measurement  and  management  capacity  of  firms  in  the  banking  sector. The research therefore seek to investigate risk management a critical tool in banking

 

1.2  Statement of the Problem

The lending functions of the bank cannot be divulged from the operation of the bank as it constitute one of the constitutional obligation of the banking sector as means of providing the needed fund for business and other legitimate business activities. However if loanable fund are properly managed they contribute immensely to the profit and growth of the bank. However the granting of loanable fund by banks to investors and other customers goes with some certain level of risk especially in developing economies like Nigeria. The level of risk attributable to loans in Nigeria is high due to the nature of the economic standard of the nation. The issue of risks constitute the  great challenges confronting banking operations .The bank is characterized by different kinds of risk which if not properly managed could lead the bank to great loses. The banking sector in Nigeria has over a long period suffered from loses attributed to the inability to effectively manage its risk portfolio. According to Webster comprehensive dictionary risk is defined as the possibility of incurring loss, harm, danger. Risks are those factors with the potential to cause harm or loss to one or more planned objectives. NDIC  annual report and statement  of  account  in 1981   classified  loans  and  advances  or  bad  debts amounted to 9.4 billion which  constitute as one of the reason  for the CBN introduction of the prudential policy for banks.

Consequently since the granting of loans are indispensable in the operations of banks it is important that risk management be given serious attention so as to avert plunging the bank into crisis. The crisis experienced in the banking sector in Nigeria prior to the consolidation policy in 2004 by the CBN constitute a point of reference for banks to redress the risk of loanable fund so as to maximize the benefit of performing loans in the sector.Therefore the problem confronting the research is to appraise risk management a critical tool in banking

 

1.3  Objectives of the Study

To determine risk management a critical tool in banking

The issue of risks constitute the  great challenges confronting banking operations .The bank is characterized by different kinds of risk which if not properly managed could lead the bank to great loses. The banking sector in Nigeria has over a long period suffered from loses attributed to the inability to effectively manage its risk portfolio. According to Webster comprehensive dictionary risk is defined as the possibility of incurring loss, harm, danger. Risks are those factors with the potential to cause harm or loss to one or more planned objectives.

 

1.4  Research Questions

What is the level of risk in banking?

What is risk management in banking?

What are the policies and measures to mitigate risk in banking?

 

1.5  Significance of the Study

The study highlight the nature of risk in the banking sector and the measures adopted in the mitigation of such risk.

 

 

1.6  Research Hypothesis

Ho Risk management in banking is not effective

Hi Risk management in banking is effective

 

1.7  Scope of the Study

The study focuses on the appraisal of risk management as a critical tool in banking

1.8  Limitations of the Study

The factors which constituted as constraint included logistics and geographical constraint

 

1.9 Definition of Terms

Credit: These are the monies granted by the bank to customers with the obligation of future repayment.

 Risk: These are those future unfavorable circumstances and possible losses

Portfolio Management:  The   is the process of   managing a mix of investment in securities.

Portfolio – This constitute as the   combination or collection of several securities on behalf of an investor.

Hedging:   Defined hedging as a system employed to smoothen out unpredictable fluctuations in financial variables so as to aid planning and avoid embarrassment induced by cash shortfalls.

Risk Assets: These constitute the loans or facilities granted to customers

Credit Analysis: A systematic examination conducted to facilitate the decision to grant credit

Performing Credit: These are loans whose principal and interest are repaid as at when due.

Non-Performing Credit: These are loans which are not serviced according to the terms of the agreement.

Doubtful Credit: This are loans whose principal and/or interest remained unpaid for more than 180 days but less than 360 day

Lost Credit: These are the loans with unpaid principal and/or interest remaining outstanding for 360 days or more and are not secured by realizable collateral.

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