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Effect of Risk Management on the Performance of Banks in Nigeria A Case Study of Zenith Bank Plc Asa Street Maitama Abuja

Effect of Risk Management on the Performance of Banks in Nigeria

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Reference ID: PS-22228-TM

DEDICATION

This research work titled "Effect of Risk Management on the Performance of Banks in Nigeria (A Case Study of Zenith Bank Plc, Asa Street, Maitama, Abuja)" is dedicated to God for his enabling grace and to all computer enthusiasts who help to make life a pleasant experience.

ACKNOWLEDGEMENT

I owe my indebtedness to my Supervisor (Name of your Supervisor), the Head of Department (Name of your HOD), the Lecturers in the department of Accountancy / Accounting, Book Authors and Profound Scholars of existing/related research material for your moral support that facilitated the successful completion of my (Tertiary Institution level). I am grateful to God Almighty and my parent for their financial support in my career. I really appreciate you all for everything, Thank you very much.

TABLE OF CONTENTS

PRELIMINARY PAGES


CHAPTER ONE

INTRODUCTION


CHAPTER TWO

LITERATURE REVIEW

  • 2.1 Introduction
  • 2.2 Conceptual Review
  • 2.3 Theoretical Framework
  • 2.4 Empirical Studies

CHAPTER THREE

RESEARCH METHODOLOGY

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Population of Study
  • 3.4 Sampling and Sampling Technique
  • 3.5 Validation of Research Instrument
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis
  • 3.8 Questionnaire Administration
  • 3.9 Ethical Consideration
  • 3.10 Statistical Analysis

CHAPTER FOUR

DATA ANALYSIS, RESULT AND DISCUSSION

  • 4.1 Introduction
  • 4.2 Presentation and Analysis of Data
  • 4.3 Re-statement of Research Questions
  • 4.4 Test of Hypotheses
  • 4.5 Discussion of Findings

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

  • 5.1 Introduction
  • 5.2 Summary of Findings
  • 5.3 Conclusion
  • 5.4 Recommendation
  • 5.5 Suggestion for Further Study

REFERENCES

APPENDIX A - “QUESTIONNAIRE”


Effect of Risk Management on the Performance of Banks in Nigeria (A Case Study of Zenith Bank Plc, Asa Street, Maitama, Abuja)

CHAPTER ONE

1.1 Introduction

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. The Banking industry in Nigeria can be said to have gone through periods of significant downturn as banks which had appeared to have favorable balances in terms of profitability and liquidity, suddenly started to report losses in their books owing to negative effects of credit risk.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.


1.2 Background of Study

The role of commercial banks is alike blood arteries of human body in developing economies as it accounts for more than 90 percent of their financial assets (ADB, 2013) due to less borrowers’ access to capital market (Felix Ayadi et al., 2008). However, intermediation function of commercial banks gives rise to different types of risks with different magnitudes and level of causes on bank performance such as credit risk, liquidity risk, market risk, operational risk etc. credit risk management are the main reasons of recent global financial crisis. The problem starts in the application stage and increases in the approval, monitoring and controlling stage if credit risk management guideline is weak or incomplete (Richard et al. 2008).

Soludo (2004) stated that policies relating to the operations of commercial banks in Nigeria were well structured to ensure that the banks meet credit and liquidity requirements in line international financial standards regarding commercial banking operations. For commercial banks to successfully continue providing the service of lending to customers in need of credit, their ability to militate against potential and actual risk is essential. Many Nigerian banks have gone into depression in the past for failing to adequately deal with risks existing in the market environment. Banks would always be vulnerable to anticipated and unanticipated risk, hence the need to have the right measures to limit the effects it would have on the soundness of the banks.

The issue of risk management is widely discussed in the banking industry because customers and investors alike have access to more information about the banks and the systems they have put in place to protect them, thus before customers decide on their choice of bank or investors decide where to put their money; they usually asses their own potential risk exposure and subsequently, what the underlined bank’s risk management policy is before making their choice.

Commercial banks face a number of risks such as credit, liquidity risk and Operational risks. Over the years’ banks have explored the financial services sector by adding new financial instruments to their portfolio. These new financial instruments have underlying risks which are usually unknown to the banks because they are not usually equipped with exhaustive information regarding the instrument before adding it to their portfolio. This subsequently means that the banks become more vulnerable to the inherent risk of the new instruments which have not been identified and assessed enough to develop a robust risk mitigation plan.

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. 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 aspects 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 deterioration in the credit standard of a bank’s counterparties.

Therefore, in Zenith Bank Plc, Asa Street, Maitama, Abuja where the research was carried out, the activities that was conducted is to know the Effect of Risk Management on the Performance of Banks in Nigeria.


1.3 Statement of Problems

Investigation revealed that the present possibility for banks to diversify into broader range of services and products make life really cool for banking entrepreneurs and managers. But this diversification advantage is a once in a life time opportunity that should be consumed with some cautions and prudence as this involves a great deal of risk. The very nature of the banking business is so sensitive because more than 85% of their liability is deposits from depositors (Saunders, Cornett, 2005).

Banks use these deposits to generate credit for their borrowers, which in fact is a revenue generating activity for most banks. This credit creation process exposes the banks to high default risk which might lead to financial distress including bankruptcy. Starting from 1990, the Nigeria financial system has utilized various reforms such as, the Universal Banking, Bank Consolidation Reserve, Bank Credit Reforms, Interest Rate Reforms and so on.

In spite of all those measures, the CBN has found some banks to be distressed in poor credit risk management which explains a high level of nonperforming loans in most Nigeria commercial banks. The pervasive incidence of non-performing loan is one of the prime causes of failure in the banking system. The internal exams to ascertain if loans are with collateralized and self-liquidating could not be held accountable.

Another serious problem is the customer’s default in repayment of credits which causes a reduction in the bank’s earnings for the period. Hence, this in turn reduces the amount of credits which the bank can grant to prospective loan applicants. All the same, beside other services, bank must create credit for their clients to make money, grow and survive stiff competition at the market place.


1.4 Aim and Objectives of Study

The aim of the study is to investigate the Effect of Risk Management on the Performance of Banks in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

  1. To examine the impact of credit risk management on total loans and advances of deposit money banks in Nigeria;
  2. To determine the relationship between credit risk management and financial performance;
  3. To ascertain the effect of risk management on the optimal performance of Zenith Bank Plc in Nigeria;
  4. To examine the causes of credit risk in Zenith Bank Plc; and
  5. To establish the degree to which banks risk management (credit and liquidity risk) have impacted profitability of Zenith Bank Plc in Nigeria.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

  • Are there causes of credit risk in Zenith Bank Plc?
  • What is the impact of credit risk management on total loans and advances of deposit money banks in Nigeria?
  • What is the relationship between credit risk management and financial performance?
  • What is the effect of risk management on the optimal performance of Zenith Bank Plc in Nigeria?
  • What is the level of degree bank risk management (credit and liquidity risk) have impacted profitability of Zenith Bank Plc?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

  • H0: There is no significant relationship between credit risk management and financial performance in Zenith Bank Plc
  • H1: There is significant relationship between credit risk management and financial performance in Zenith Bank Plc

Hypothesis Two

  • H0: There are no significant factors affecting credit risk management on total loans and advances of deposit money banks in Nigeria
  • H1: There are significant factors affecting credit risk management on total loans and advances of deposit money banks in Nigeria

1.7 Significance of Study

This study will be of immense benefit to the following groups:

  1. Banks: The result of this study should provide information to the deposit money banks on the level of performance in the face of their credit risk management in place.
  2. Investors: The study will provide investor with the knowledge they need about risk management in banks. They will then be able to study the extent to which a bank is exposed to risk and be able to take wise decisions regarding where to invest.
  3. The General Public: The product of this study can create the awareness on the extent of credit risk and its management in banks. This can serve as eye-opener to the general banking public visa-vis the safety of their deposits in banks.
  4. Researchers: Essentially, the results of this study can provide a reference document for further researches and evaluation of risk management by other researchers. This research will increase the availability of literature in the field of risk management in banks.
  5. Policy Makers: Finally, the study will be of immense benefit to the policy makers as it will provide more insight into risk management and guide them in policy making and implementation.

1.8 Scope of Study

The scope of the research is focused on the Effect of Risk Management on the Performance of Banks in Nigeria using Zenith Bank Plc, Asa Street, Maitama, Abuja as a case study.


1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

  1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
  2. Research material: availability of research material is a major setback to the scope of the study.
  3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
  4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Credit Risk: This refers to delinquency and default by borrowers i.e. failure to make payment as at when due.

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.

Price Risk: This refers to variability in cash flows due to change in input and output prices.

Credit Administration: This is the system used in managing the exposure of financial institution to loan delinquency and default.

Business Risk: This refers to variability in cash flow.

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.


1.11 Organization of the Study

The project research will be structured into chapters as describe below:

Chapter one of the study, provides background of the study, stating the problem of the study and the research questions and hypotheses to be tested in the study. It also highlights the significance of the study and scope of the study.

Chapter two reviews related literature on the Effect of Risk Management on the Performance of Banks in Nigeria.

Chapter three discussed the research methods to be used in designing the study which will include research design, population, sample size and sampling technique, data collection and data analysis methods.

Chapter four presents the data gathered in frequency and percentage tables. The data will also be analyzed and research hypotheses will be tested with chi-square statistical test.

Chapter five summarizes the outcome of the study, draw conclusions based on the findings of the study and make necessary recommendations.

CHAPTER TWO

2.0 Literature Review

2.1 Introduction

This chapter focuses on the review of related literature. A literature review includes the current knowledge as well as theoretical and methodological contributions to a particular topic. It documents the state of the art with respect to the topic you are writing. It surveys the literature in the topic selected. In this research work the literature review includes the …

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