ABSTRACT
This
study examines the impact of risk management in two Nigerian Banks. Data were
obtained from the annual accounts and reports of the two banks (AfriBank
Nigeria PLC and Fidelity Bank Nigeria PLC). An event study methodology was
employed to examine the effects of deposit, asset quality and credit risk
exposures on the growth and profitability of Nigeria commercial banks.
Similarly,
results shows the significant impact of asset on profit. On a whole, the study
finds the need for banks in Nigeria to devote enough attention to the
management of financial risks in the banking industry.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The Nigerian Banking Industry for the past decades has witnessed series
of Banking distress and subsequent failures. Banks that had been doing well
suddenly announced large losses due to credit exposures that turned sour,
interest rate position taken or derivate exposures that may or may not have
been assumed to hedge balance sheet risk. In response to this, there is indeed
urgent need for banks in Nigeria to devote enough attention to the management
of financial risks in the Nigerian Banking Industry. The 1989 annual report and
statement of account of NDIC revealed that classified loans and advances or bad
debts amounted to 9.4 billion which contributed 40.8 percent of total loans and
advances and 280 percent of shareholders funds” (Hall, 1991:8). It is the
development of his nature that have led to the introduction of the CBN
prudential guidelines for banks.
Cooker (1989:115), observes that “the main function of a bank is the
collection of deposits from those with surplus cash resources and the lending
of these cash resources to those with an immediate need for them” in fulfilling
this:
§
It must be
easily understood
§
It must be
permanent
§
It must be
able to absorb losses
These
three features are expected to guide member countries, including Nigeria, in
assessing instruments to be used in raising bank capital. The bottom line in
the debt capital is a risk instrument for financing bank operations and should
be discourage as much as possible. The Basel Committee on banking supervision
also introduced the “New Capital Accord” which was implemented in 2007. The New
Capital Accord required capital charges to be made for credit, market and
operational risks. This is aimed at protecting depositors, consumers, and the
general public against losses arising from bank fragility and failure (Umoh:
2005). Ever since 1988, captains of the Nigerian Banking industry have shown
keen interest in improving the risk analysis, measurement and management
capacity of firms in the banking sector. Recently risk managers of major banks
came together in Lagos to form an organization named Credit Risk Association of
Nigeria (CRAN). It is hoped that CRAN will offer them
opportunities for networking on issues of bank risk management. Concerted
efforts are also being made by captains of banking industry to reduce the risk
exposure of banks in lending to borrowers generally but especially to
commercial bank, which is traditionally prone to market and credit risk.
Coincidentally to this activity, and in part because of our recognition
of the industry’s vulnerability to financial risk, the Wharton Financial
Institutions center with the support of the Slon Foundation, has been involved
in an analysis of financial risk management processes in the banking sector.
In the banking sector, system evaluation was conducted covering many of North
America’s super regional and quasi money center commercial banks as well as a
number of major investment banking firms.
The Nigerian economy is increasing begin globalized by the deliberate
government actions since July 1986 when the federal government began the
implementation of the Structural Adjustment Programme (SAP). The SAP sought to
deregulate and free the economy from government control with a view to allowing
market forces determine the production and consumption decisions of economic
agent within the country. The deregulation process which was accompanied by
privatization and commercialization government enterprises, had far-reaching
impacts on the entire economy. In particular, deregulation of interest rates
affected bank lending to the real sectors of the economy. In more recent times,
government adopted business consolidation strategies viz: merges, acquisitions
and taken over as part of its efforts to facilitate the ability of firms in
financial services industry to become global market Players.
According to the governor of the Central Bank of Niger (CBN), business
consolidation in the banking sector was to, among other things; make Nigeria
banks complete favourably in the global financial market” and to generate a
high capital base that “will provide banks with the resources to met the cost
of compliance in the areas of credit and market risk management” (Soludo,
2005:98-99).
Risk
management is at the core of lending in the banking industry. Many Nigerian
banks had failed in the past due to inadequate risk management exposure. This
problem has continued to affect the industry with serious adverse consequences.
Banks are generally subject to wide array of risks in the course of their
business operations. Nwankwo (1990:15) observes that ‘the subject of risks
today occupies a central position in the business decisions of bank management
and it is not surprising that every institution is assessed an approached by
customers, investors and the general public to a large extent by the way or
manner it presents itself with respect to volume and allocation of risks as
well as decision against them’. Other risks include insider abuse, poor
corporate governance, liquidity risk, inadequate strategic direction, among
others. These risks have increased, ‘especially in recent times as banks
diversity their assets in the changing market. In particular, with the
globalization of financial markets over the years, the activities and
operations of banks have expanded rapidly including their exposure to risks.
1.3 OBJECTIVES
OF THE STUDY
Basically; the main objective of this is to
determine the effect of deposit on banks
lending and risk management.
Others are:
(i)
To
determine how asset quality can be efficiently and effectively monitored.
(ii)
To examine
the effects of credit risk exposure on growth and profitability of Nigeria
commercial banks.
1.4 RESEARCH QUESTIONS
(i)
How does deposit
of banks affect the portfolio of credit by banks?
(ii)
How does
the quality of banks assets in terms of risks exposures affect banks
profitability?
(iii)
What are
the effect of credit risk exposures on growth and profitability of banks?
1.5 RESEARCH
HYPOTHESIS
The following alternative and null hypotheses will
be formulated such as to uphold or reject the preposition of the “risk
management in two Nigerian commercial banks”.
(i)
Ho: Deposit does not have a significant positive
impact on
(ii)
Ho:
Asset quality does not have a significant positive impact on profitability of a
bank
(iii)
Ho:
Credit risk exposures do not have a significant positive impact on
profitability of banks.
1.6 SCOPE
OF THE STUDY
This
study covers risk management in Afri Bank Nigeria PLC and Fidelity Bank Nigeria
PLC. Pre and Post banking consolidation in Nigeria, specifically between 2003
and 2008.
1.7 SIGNIFICANCE OF THE STUDY
This study has a number of significant dimensions.
(i)
The result
of this study should provide information to the
commercial
banks risk management department on the progress so far made in identifying and
evaluating risks as to enhance growth and profitability of the financial
institutions.
(ii)
The result
of this study should also reveal how much such progress has impacted on the
growth of the entire commercial banks in Nigeria.
(iii)
Essentially,
this work is a step in a right direction to assist and enlighten the general
public on what risk management in commercial banks is all about and hence guide
them in their immediate decision of handling risks.
(v)
Furthermore,
there is need to provide a reference document for further researchers and
evaluation of risk management conducted by other Nigerians/other Nations. This
research work will go a long way to increase the availability of literature in
the field of risk management in the banks and other related business associates
that involve risk in the day-to-day running of the businesses.
(vi)
Finally,
the study is of immense benefit to policy makers, investors, financial managers
lecturers and the general public.
Portfolio Management: The process of making and carrying out a decision to invest in securities (Anyafo, 2001 : 93).
Portfolio - Akinsulire (2002:357). Defined portfolio “as the combination or collection of several securities on behalf of an
investor.
Hedging:
According to (Ebhalaghe, 1995 : 161) 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.
Forward
Contracts: This is a contract usually between a bank and customer to buy or
sell a specified quantity of foreign currency at an agreed future data
(Akinsulire, 2002: 467).
Tenor
Mismatch: Involves matching the tenor of an investment with the tenor of the
borrowed funds, so invested or a mismatch is said to occur when the tenor of
investments in aggregative exceeds the contractual tenor of the borrowed funds
(Ebhalaghe, 1995:144).
Currency
Swap: This is a simultaneous borrowing and lending operation whereby two
parties exchange specific amount of two currencies on the outset at the sport
rate (Akinsulire, 2002:474).
Anyafo, A. M. O. (2001), Investment Risk
Evaluation: The State of the Art in Investment
and Project Analysis, Enugu: Banking and Financial
Publication.
Akinsulure,
O. (2002), Financial Management, Second Edition, Lagos, El-Toda Ventures
Limited.
Ebhalaghe,
J. U. (1995), Corporate Financial Risk exposure Management, Lagos,
Ronald Printing Company Limited.
Hall
J. A. (1999), “Banking Prudential Guidelines and their Impact on the Banking
Industry, being paper presented at the Bankers forum organized by CBN,
June 5.
Nwankwo,
G. O. (1990) “Prudential Regulation of Nigerian Banking” Institute of
European Finance, Lagos: University of Lagos publication.
Nigerian Deposit Insurance Corporation (1988),
Annual Report and Statement of Accounts.
Soludo,
C. (2005), Opening Remarks to Conference Participants, in CBN (ed), Consolidation
of Nigerian’s Banking Industry: Proceeding of Fourth Annual Monetary
Policy Conferences, Abuja, FCT.
================================================================
Item Type: Postgraduate Material | Attribute: 60 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment