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RISK MANAGEMENT IN NIGERIAN BANKS: A
CASE STUDY OF UNION BANK UYO
INTRODUCTION
For bank to
be standard it must undertake investments it shows that the decision taken on
portfolios management, specify accurately a unique sequence cash flow cannot be
forecast accurately as it subjected to the occurrence of future events.
This
determine the probability element in decision making, therefore risk arises in
investment evaluation because occurrence of the possible event with certainty
and consequently can not make any correct prediction about the cash flow
system, much has been said in literature as performance of union bank. I will
first attempt to bring the subject matters (Risk management in Nigeria banking
institution).
Pandey
(1981) defines risk as the potential hazard of the variability that is likely
to occur in the feature returns of a project, he sees the project as being
little risk free or highly risk. An investment in treasury bills for example
has little or no risk associated with the, it is for this, has the very
interest payable treasury bills is very or comparatively low. The interest paid
on the investment in sick or share ranks higher than that of treasury bills
because of the level of uncertainty of variability of feature returns.
Measurement of
different method that is commonly used in the level of uncertainty of
variability of feature returns standard deviation and co-efficient of
variations, while conventional techniques used to measure the risk of the pay
back period risk adjusted, discount rate, certainty equivalent, statistical
method like probability assignment standard deviation and co-efficient of
variation are also applicable in the management of risk.
Nwankwo, in
the year 1999, he wrote a book on bank management principle and practices which
appreciate the existence of the risk and need’s to be manage effectively. He
defines risk as the possibility of loss injury, occur and in his estimation,
risk is the main issues in business of banking, he classified risk into two
categories. They include:
1 Fraud Risk
Market Risk
1 FRAUD RISK: Fraud is deliberately
deception or checking or unlawful gain by stealing, deceitful way, defrauding
and embezzlement in spite of all these issuances schemes which is recently set
up the federal government (NDIS) Nigeria Deposit insurance schemes, this form
of risk is responsible for the case of bank failure so far witnessed Nigeria
Banking system today.
2. MARKET RISK: Market risk is defined as
transaction risk, which occur in form of an interest rate risk, earning risk,
liquidity and foreign exchange risk.
Nwankwo went
further to discuss risk management of risks.
Objectives
of Risk management
Implementation
as assignment of responsibility for managing the risk.
Types of
risk
1 Objectives of risk management is to take
consideration of the observable risk under control which depend on the types of
risk that is being considered for effective implementation which include three
strategies.
a. Risk preventation and loss reduction
b. Risk
transfer
c Risk retention
a. Risk Preventation And Loss Reduction:
This is
measure adopted to prevent the occurrence of risk and minimize the loss, where
by the risk has already occurred.
b. Risk Transfer:- This is the type of
transfer to another financial institution like the insurance companies.
c. Risk Retention:- This is the type of risk
bank will usually absorb or change to their profit and loss account. Having
mapped out strategies the next stage would be the implementation and review.
To implement
all, the department must work in harmony according to agreed standard.
Uncoordinated approach can only lead to crises than earlier anticipated. All
measured taken must be live with the management policies, which necessary
adjustment, has been made to relate such polices to real life situation.
It is also
necessary to assign responsibility for monitoring co-ordination, general
appraisal and review.
While
commenting on major financial risk Adekanye (1992) the element of banking
recognized the need for banks to seek a harmony between risk rate of returns
and liquidity, therefore in managing assets and liabilities banks must bear,
sustained warning growth and control of exposure to financial risk, he
identified these major financial risk as follows:
MARKET RISK
1 Liquidity Risk
2 Credit Risk
According to
Adekanye, he affect the influence of market force upon the availability of
funds, this create liquidity risk upon the movement of foreign exchange risks.
Market processes are related to economic system of financial and political
developments. To avert a crisis situation in the sources and uses of fund.
Hence the
control and management of the market risk can be achieved by the following:-
a. Operation of active money market. Through
the naira, money is not yet matured
b. Diversifying sources of funds, types of
instrument and well articulated matching principles.
Furthermore,
the probability is always there that credit which is extended to this form of
risk, he recommended the divers to the nature of debtors and their need or
location. Added to this is the maintenance of the standard of credit
management. The needs for provision or bad debts are important in the acceptance
of marketable assets securities.
Seminaries,
customers need assurance that the bank is always in position to meet their cash
document therefore the bank must to maintain the customer confidence that
measure they must keep sufficient stock for liquid asset and as statutory
liquidity ration must be observed in bank.
Analyzing
risk, Mayo BPP 1990 Financial Management study text differentiate risk from
uncertainty, accordingly risk occurs when it is unknown, the future outcome,
when the various possible future outcome maybe expected with some decree of
confidence of the knowledge of past or existing events. In the words
probabilities of alternatives outcome can be estimated.
1 Business Risk
2 Financial Risk
Because risk
is seen as that associated with a project undertaken, financial risk is
considered as that which helps the company in the areas that may not be able to
make sufficient profit after paying debts interest, to finance a satisfactory
divided method or risk analyzing like using profitability analyzing for the
cash low which is also considered.
Management
of risk has assumed such as important dimension in banking operations, which
could be considered under two main
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