The Effect of Risk Management in the Nigerian Banking Industry : Current School News

The Effect of Risk Management in the Nigerian Banking Industry

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The Effect of Risk Management in the Nigerian Banking Industry.

ABSTRACT

The global phenomenon in the financial service industry is the consolidation of financial activities towards ensuring financial stability. It is occurring at a rapid pace due to changes in the economic environment, which often alter the constraints faced by financial service firms. At the same time, the changes are battling to combat poor-risk asset management which has been established by some studies to be the basic cause of bad debt, a major distress syndrome in the banking industry.
The scenario has been argued to be a factor that downsizes banks’ profitability within any fiscal year and often times destroys customers’ confidence in banking. The present study attempted an evaluation of the effect of risk management in the Nigerian Banking industry in this era of consolidation.

The major objectives were to determine the relationship between the income of banks and the volume of their risk assets; evaluate the effect of loan repayment on the profitability of banks; and lastly, to determine the impact of loan repayment on loanable funds available in the Nigerian banks. By employing the survey research method, the study used a questionnaire instrument to generate the primary data needed for the study.
The generated data were further subjected to a chi-square inferential statistical test to determine if the null hypotheses formulated in chapter one were either validated or nullified. Testing at a 95% confidence level with 8 degrees of freedom, the null form for hypothesis one was not rejected.
This implies that there is a negative relationship between a bank’s income and the volume of their risk assets. But the null form for hypothesis two was rejected. The result showed that Loan Repayment has a Positive effect on the bank’s profitability. Lastly, the null for the third hypothesis was not again rejected.

INTRODUCTION

Background of Study
The traditional theory of banking is rooted in the concept of intermediation between depositors and borrowers. Banks act as intermediaries by accepting deposits from customers and offering loans as well as advances to others that variously need fund for investments.

In other words, one of the basic functions of banks in granting loans and advances to customers who utilize these facilities for investment in expectation of profitable results (Idam, 2002).
The driving motive for the lending proposition is the expectation that borrowing customers will profitably utilize the facility when granted such that returns from the investment will cover both the principal and interest on the loan as well as contribute to the growth of the business.
Successful lending is therefore one that is mutually beneficial to both the lending bank and the customer. Bad lending creates problems both for the customer and the bank. When the proposed venture fails, a bank loan is lost and customers’ businesses may eventually end in liquidation. Besides, the success or failure of bank lending does not only affect the two parties involved. There are numerous multipliers effects and macroeconomic implications.
When bank loans are successfully and profitably invested, the resulting growth in micro industrial units leads to overall macroeconomic growth and development. Hence, what credit policies and management techniques the bank adopts have far-reaching effects on the economic well-being of the nation (Doyle, 1972).
Credit risk is the measure of possible loss to the bank due to the failure of any third party to meet its repayment obligation as they fall due (Ahmed and Alashi, 1992). It has a great effect on the safety and soundness of the individual bank and the financial system as a whole. Since risk and return have been established to be positively correlated (Tracy, 2002)

REFERENCE

Adekanye F. (1986), The Elements of banking in Nigerian, F. and A. Publisher Ltd, Lagos
Ahmed, M.K, and Alashi, S. 0 (1992) “Bank Prudential Regulation in Nigerian”, A Central bank of Nigeria Publication
Akingbola, E.B.D (1996), “Beyond the failed bank Decree, 3rd Senior Treasure’s Retreat: A Collection of Papers Vol 3:3
Baye and Jansen, D.W (2006), Money, Banking and Financial Markets: An Economic Approach, India; AITBS Publisher.
CBN (1990) “Prudential Guidelines for Licensed Banks,” CBN Publication, Lagos
CBN (2004) “Payment System Development in the West Africa Monetary Zone (WAMZ): nature, Challenges, and Prospects,”

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