THE IMPACT OF RISK MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS, CASE STUDY OF BICEC LIMBE

Project Details

Department
ACCOUNTING
Project ID
ACC05
Price
5000XAF
International: $20
No of pages
60
Instruments/method
QUANTITATIVE METHOD
Reference
YES
Analytical tool
REGRESSION ANALYSIS
Format
 MS Word & PDF
Chapters
1-5

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 ABSTRACT

The banking sector in Cameroon is exposed to various risks that originate from both the internal and external environment. Banks’ financial viability and long-term sustainability are threatened by financial risk. Market risk, Credit, Liquidity, and Operational risks possess a major challenge despite growth in the sector.

This study sought to explore the impact of risk management on the financial performance of commercial banks in Cameroon the case of BICEC Limbe.

The quantitative and qualitative research design was adopted in the study. The target population of this study was the BICEC (Banque Internationale du Cameroun pourl’Eparge et le Credit) Bank Limbe. The population of this study comprised of one hundred and twenty (120) employees of BICEC Bank Limbe.

The sample size used in the study was fifteen (15) employees. The census technique was used in the study to select the respondents from the list of employees provided by the human resource department. The data collecting instrument that was used was a tailor-made structured questionnaire developed by the researcher, particularly for this study.

The questionnaire made use of a five-point Likert scale to rate the importance of various risk management factors. The research was analyzed using Statistical Package for Social Sciences (SPSS) version 25.

The research had both dependent and independent variables. The main dependent variable was financial performance while the main independent variable was risk management. The independent variable was broken down into market risk, liquidity risk, and credit risk.

Financial performance is the dependent variable that was viewed in terms of capital adequacy, market power.

Research study shows that risk management possesses a significant impact on capital adequacy, return on equity just to name a few. Also, the findings show that the BICEC Limbe branch has put in place several strategies including avoidance, mitigation, transfer, and acceptance strategies for the various risks.

The avoidance strategy means risks whose reward is far more than the cost, that is, showing an unrealistic situation is avoided.

The mitigation strategy involves reducing the impact of the risks while the transfer strategy is employed when risks cannot be avoided and so part of it is transferred through insurance. Since banks most face risks, the acceptance strategy is used.

Risk management was found to be among the variables which have an impact on the financial performance of BICEC bank Limbe. The impact shows that bank increased exposure to risk may reduce bank’s profits if not well managed.

From the concepts of return on equity (ROE), net interest margin (NIM), and return on assets (ROA), risk management has a significant relationship with a bank’s profitability.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The banking sector has a pivotal role in the development of an economy. It is the key driver of the economic growth of each country and has a dynamic role to play in converting the idle capital resources for their optimum utilization so as to attain maximum productivity (Sharma, 2003).

In fact, the foundation of a sound economy depends on how sound the banking sector is and vice versa. There is a consensus on the delicate but predominant position occupied by financial institutions, especially banks, both in the developed and emerging economies.

Commercial banking businesses are risky ventures, hence, risk-taking is an inherent element of banking operations and indeed, profits are in part the reward for successful risk-taking in business.

In the simplest words, the risk may be defined as the possibility of loss. It may be financial loss or loss to the reputation/ image (Sharma, 2003).

The risk arises from the occurrence of some expected or unexpected in the economy or the financial market. Risk arises from staff over the side which causes erosion in asset value and consequently reduces the bank’s intrigue value.

Financial institutions must take the risk, but they must do so consciously (Carey, 2001). However, it should be borne in mind that banks are very fragile institutions that are built on customer’s trust, brand reputation and above all dangerous

Leverage. In case something goes wrong, banks can collapse and the failure of one bank is sufficient to send shock waves right through the economy (Rajadhyaksha, 2004).

Therefore, bank management must take utmost care in identifying the type as well as the degree of its risk exposure and tackle those effectively.

Financial risks are only one category of a broad field of risks. Furthermore, financial risks can be classified into three subclasses credit risk, liquidity risk, and market risk. For financial risk management, there are many different kinds of definitions that can be very broad or narrow but there is no globally accepted definition of financial risk management.

Risk management can be viewed as the risk handling process.

(Panol et al., 2009) define risk management as the process whereby decisions are made to accept a known or anticipated risk and/ or the implementation of actions to reduce the effects or likelihoods of those risks.

Furthermore, other views, risk management leads to avoiding, reducing, transferring, sharing, or taking the risk.

Also, it is good to notice that risk management is a very broad term due to the wide range of risks and thus there are several categories of risk management as financial risk management, operational risk management, supply chain risk management.

Financial performance is a measure of companies’ policies and operations in monetary terms. It is a general measure of a firm’s overall operation health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

There are many different ways to measure a bank’s financial performance. This may be reflected in the bank’s return on investment, return on assets, value-added, among others and is a subjective measure of how a bank can use assets from its primary mode of business and generate revenues.

The financial industry, like other industries, is in business to earn profits by selling its products. To maximize profits, financial institutions develop new products to satisfy their own needs as well as those of their customers; in other words, an innovation that can be extremely beneficial to the economy is driven by the desire to get or stay rich. This view of the innovation process leads to the following simple analysis:

A change in the financial environment will stimulate a search by banks for innovations that are likely to be profitable. To survive in the new economic services that would mitigate financial risks and improve performance.

Most banks perform the basic elements of risk management. Banks with more mature risk practices d better financially as they tend to outperform the other banks by making stronger decisions, more efficiently deploying scarce resources and reducing their exposure to negative events.

Banks around the world have made substantial investments in personnel, processes and technology to help control banking risk. Historically, these risk investments have focused primarily on financial controls and regulatory compliance. Effective risk management starts at the top with clarity around risk strategy and governance. It is critical that proper oversight and accountability exist at the board and executive levels.

In any organisation especially commercial banks, financial performance is affected by risks.

There is a significant relationship between bank performance and risk management. Better risk management results in better bank performance. Thus, it is of crucial importance that banks practice prudent risk management.

As a result, banks put great emphasis on risk as this determines their survival and financial performance. Banks at every point in time are faced with a number of risks. Thus, as risk is indispensable for banking business, proper assessment of risk is an integral part of a bank’s management system.

Banks are focusing on the magnitude of their risk exposure and formulating strategies to tackle those effectively.

Commercial banks have to face especially as these risks have a bearing on their financial performance.

1.2 Statement of the Problem

Commercial banks refer to profit-making privately-owned financial institutions which receives deposits from the general public and safeguards them and make loans Zhufanyi (2004, p 169).

According to Zhufanyi, commercial banks perform three main (3) functions which include: receiving deposits, lending and agents of payment all of which involve risk.

Receiving deposits which are to the basic function of commercial banks which in performing they face either operational, liquidity or reputation risk.

Deposits are divided into two (2) accounts: current and deposit account. Money deposited in the current account can be withdrawn at any time by the use of a cheque. Lending, which is the most profitable function is characterized by credit, business, and systematic and moral hazard risks.

Banks also act as agents of payment in that, banks collect and transfer money through the cheque system. Commercial banks settle indebtedness on behalf of their customers such as settling bills, payment to employees and cashing of cheques.

This function also involves risk-taking. Banks also act as guarantors by standing behind their customers to pay off customer’s debt, when they are unable to pay. They also act on behalf of the customers to manage and protect their properties or issue and redeem their securities.

All banking activities expose banks to closely intertwined sets of risks which impedes sound performance lading to bank failure and consolidation. Evidently, the risk is directly proportionate to return; the more risk a bank takes, the more it can expect to make more money.

However, greater risk also increases the danger that the bank may incur huge losses and be forced out of business. Marrison was very correct when he said a bank must run its operations with two (2) goals in mind which were,

To generate profit and to stay in business (Marrison, 2005). If a bank is going to perform financially then it should be aware of the unavoidable risk and how to better manage them. Therefore, there is a need to examine the effects bank risk has on the performance of banks.

It is without a doubt that several types of research have been carried out on the topic of risk, however, much emphasis has been placed on more variety of risks. Specifically, this research is on the effects of risk on the financial performance of commercial banks.

This research work will go a long way in helping a commercial bank understand the various types of risks they face and how they affect their financial performance. It shall open a new area of further research work and at the same time advance challenges to upcoming researchers.

1.3 Research questions

a. Main question

What is the effect of Risk Management on the Financial Performance of BICEC Bank?

b. Specific questions

The research will be guided by the following research questions:

1. What are the various risks faced by BICEC?

2. How is performance measured in BICEC? How does BICEC Bank manage the various risks?

3. What are the difficulties faced by BICEC Banks in managing the various risks?

4. How does risk explain the performance of BICEC?

How to analyze the effects of credit risks on the financial performance of BICEC.

5. How to assess the effects of reputational risk on the financial performance of BICEC.

6. How to examine the impact of operational risk on the financial performance of BICEC.

7. How to evaluate the impact of market risk on the financial performance of BICEC.

1.4 Objective of the study

The main objective of the study is to examine the effect of risk on the financial performance of commercial banks.

Specific objectives of the study include:

1. To analyze the various risk faced by the effect of credit risk on the financial performance of BICEC.

2. To evaluate the impact of market risk on the financial performance of BICEC.

3. To assess the link between risk and performance identify the difficulties faced by Commercial Bank? In managing the various risks.

4. To assess how the various types of risks do affect the operations of the bank of BICEC.

5. To make recommendations on how the various risks can be better managed so as to improve on performance.

6. To access the financial performance of BICEC.

7. To evaluate the link between risk and financial performance in BICEC.

8. To assess the financial performance of BICEC.

9. To examine the impact of operational risk on the financial performance of BICEC.

10. To assess the effects of reputational risk on the financial performance of BICEC.

 

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