A STUDY OF RISK MANAGEMENT IN NIGERIAN BANKS: FIRST BANK OF NIGERIA PLC AS A CASE STUDY
ABSTRACT
The study analyses the risk management framework of Nigerian banks taking First Bank of Nigeria Plc as a case study.
Risk is a fact of life that requires management and/or mitigation in evading its adverse effect in banking operations and practices in Nigeria.
In reviewing the literature, it was deduced that bank operations have inherent in it, risk of which are various natures ranging from credit, market, operations, liquidity, legal, information etc having their unique characteristics, treatment options, evaluations and measuring criteria that the success of its business is tied to its risk management. The philosophers of risk management, conceptual  framework as proposed by several authorities have not made certain, any best way of risk management in bank although options such as avoidance transfer, retention and/or even portfolio diversification have been unshelled as probable measures of risk control. The study sample transcends beyond First Bank of Nigeria Plc to include the operational 23 commercial banks in Nigeria.
The ordinary Least Square (OLS) was used for data analysis for which data was obtained from the statistical bulletin of CBN in 2009.
The results were discussed, thus revealing that there is a significantly positive relationship between the nations GDP (economic health) and the activities of bank in areas such as credit to private sector and money supply.
Based on the findings, it was recommended that the Nigerian banks in conjunction with monetary authorities exert more efforts in curbing by way of managing and mitigating, the risk of banks in Nigeria. Hence the need to be systematic and structured, transparent and inclusive, dynamic, iterative and responsive to change and create value always.
TABLE OF CONTENTS
CHAPTER ONE
1.1    Background of the Study    -    -    
1.2    Statement of Research problem     
1.3    Objective of the Study    -    -    -    
1.4    The Research Hypothesis    -    -
1.5    Significance of the Study     -    -    -
1.6    Scope and Limitation of the study    -    -
CHAPTER TWO: LITERATURE REVIEW
2.1    Risk in Nigerian Banks-    -    -
2.1.1    What is Risk?    -    -    -    -
2.1.2    Nigerian Banks in Risky Business    -
2.2    Risk Exposures (Types and Measures)-    -    
2.2.1    Credit Risk Management    -    -    
2.2.2    Credit Exposure (Types of Criteria)    -
2.2.3    Market Risk Management     -    -
2.2.4    Operations Risk Management     -    
2.2.5    Liquidity Risk Management     -    -    -
2.2.6    Legal Risk Management     -    -
2.2.7    Information Security Risk Management     -
2.2.8    Compliance Risk Management     -
2.3    Process of Risk Management in Nigerian Banks
2.3.1    Risk Analysis Risk and Return     -    
2.4    Theoretical Foundations and Conceptual
framework for Risk-Return Analysis    
2.4.1    CAPM (Capital Asset Pricing Model)     -    
2.4.2    APT (Arbitrage Pricing Theory)    -
CHAPTER THREE: RESEARCH METHODOLOGY
3.1    Research Design    -    -    -    -    
3.2    Population of the Study    -    -
3.3    The Sample and Sampling Technique    
3.4    Data Collection                -
3.5    Data Analysis Techniques         -    
CHAPTER FOUR : DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1    Introduction    -    -    -    
4.2    Data Presentation    -    -    -
4.3    Analysis and Interpretation of Data Result    
4.4    Policy Implications    -
CHAPTER FIVE:
SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1    Summary of Findings    -    -
5.2    Recommendations     -    -    
5.3    Conclusion    -    -    -    -    
    Bibliography     -    -    -    
    Appendix     -    
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
    There is no gain saying, the fact that banking business is a sensitive business highly induced with maximum risk from operations to image making among other things.
    However, the issues of risk management in the banking sector is gradually gaining light and the consciousness is on the increase thanks to the global economic meltdown which has to a greater extent exposed the inefficiency of bigger financial institutions to manage risks at their disposal especially that of credit risk. This adduced to the fact why big banks such as the Lehman Brothers went bankrupt, later taken over by JP Morgan  of Washington Mutual (America’s largest bank); take over of Merill Lynch by Bank of America US Government takeover of AIG  (World’s Largest insurer), the government bail out of Freddie Mac and Fannie Mac (key US mortgage institutions); and the collapse of Bear Steams amongst other developments, led to a failure of confidence that let to a credit freeze and the current meltdown. In the Nigerian peculiarity, evidence is drawn from the banking recapitalization and consolidation processes of 2005 drastically shrinking the one time 89 institution (banks) industry to 24 banks. Also, recently is the Central Bank (CBN) exposure of failing banks which will leave the industry having no fewer than four institutions to be rescued.
    At the macro level, Nigeria and other Sub-Saharan African countries no doubt, are vulnerable to the effects of global recession although the impact is yet to completely unfold. The fact remains that if financial institutions in this part of the world should take with levity, the issue of risk management and corporate governance, the downfall of bigger financial institutions are inevitable even in the face of the capital market crisis rocking the economy presently which came as a result of banks exposure to the market. Hence, it is undisputable that failures of most financial institutions would over were attributed to the lax and carefree attitude and the insensitivity of managers to risk management issues at their disposal.
    Risk therefore, is a disturbance variable in banking and incidentally can not be avoided as long as operators (bankers) remain in business wherein the challenge is not taking risk without calculation, as the returns from such risks will usually be outstanding if successful but devastating if unsuccessful. Upon this note, the chartered institution of Bankers of Nigeria (CIBN), through the office of the directors of consultancy, training and research urged bankers to always identify risks, assess risks and mitigate them.
    Moreover, First Bank Nigeria  Plc has noted that there has been no systematic banking crisis of the scale witnessed in advanced economies like the US and Europe, because with the minimal cross border banking system linkages, there is less exposure to complex financial products and financial systems are not well integrated with other global financial markets which have undergone a revolution driven by deregulation, a rapid pace of financial innovation including risk of alternative capital pools and global financial integration to which effect, the crisis continues to unfold itself on the national economic becoming evident in the following areas: shrinking economy and/or show growth; decline in government revenue; inflation (which pushed up the year-one-year headline inflation rate the 15.7 percent in 2010 compared with 6.6 percent at the end of December 2007 thus, adversely affecting the purchasing power of consumer and increasing operating cost); credit crunch; drop in equity market (the general flight to safegy and liquidity triggered by the global meltdown led to the withdrawal by foreign investors from our equities market which in turn triggered a bearish trend that saw all share index loosing about 45.8 percent of its value with the market capitalization dropping by N3.2 billion in 2008 alone) and so on. By this, First Bank Nigerian Plc has posited variants of risk natures ranging from the characters of operational risk, legal risk, market risk, credit risk etc, its management philosophies as well as procedures.
    Moreso, risk has today assumed different connotations in the everyday usage, stressing that it may be defined as cause of action and sometimes inaction, taken under conditions of uncertainty which exposes one to possible loss. However, in a banking institutions, financial risk is the possibility that the outcome of an action could bring up adverse impacts which could either result in a direct loss of earnings or capital or may result in imposition of constraints on the banks ability to meet its  business objectives or even loss a business opportunities. Hence, risk management is a discipline at the core of banking business and encompasses all activities that affect a banks risk profile involving identification measurement, monitoring and controlling of risks. Risk management therefore, should be a continuous and developing process and should run throughout the organization which ought to translate the strategy of an organization into tactical and operational objectives assigning responsibility throughout the organization with each manager or employee being made responsible for the management of a component of the risk as part of his job description. This will indeed support accountability, performance, measurement and reward thus, promoting operational efficiency at all levels.  
1.2    STATEMENT OF THE PROBLEM
    This understudy, tends to profer a headway for the following puzzles in risk management in banks.
a)    Are there established risk management policies and procedures, articulated, documented and entrenched in Nigerian banks?
b)    Does every party involved in the risk process, adhere strictly to these policies and procedures?
c)    Does the risk management process provide for close analysis and monitoring of the dynamics of operating environment with a view to evaluating their impact on the banks past, present and future risk decisions?
d)    Are the banks risk managers adequate in number, efficient in training and experience to meet challenges of the market that is both highly competitive and affected by recession and technology?
e)    How relevant is risk return consideration factors in the operations analysis process of Nigerian banks?
f)    Do Nigerian banks have any known standard risk-acceptance criteria peculiar to the bank concerned or perhaps the banking industry?
g)    Are there, well articulated risk-rating system and format that ensures consistency in the evaluating existing and prospective risk portfolio?
h)    What role does the prudential regulation play in enhancing banks risk management systems?
i)    Are there lapses in the risk management process of Nigerian banks today and what possible suggestive remedial measures should be taken.
j)    If there is a direct relationship between banks’ risks and financial crisis.
1.3    OBJECTIVES OF THE STUDY
    In a bid to explore the realism inherent in risk management of Nigeria banks, this study posits the following as purposes of t he research work:
a)    Identify risk management processes adopted by Nigerian banks.
b)    Establish the degree of entrenchment and adherence of such policies by risk managers in the banks.
c)    Identify whether inherent risks are commensurate with return through appropriate pricing of the facility which should be a function of facility (enterprise) risk rating.
d)    Ascertain the role of government at enhancing banks risk management process through its relevant regulatory authorities.
e)    Determine how Nigerian banks balance the challenge of providing expenditure service delivery to customers with thorough and prudent bank management process especially given the threat that exist from environment; company; and investment analysis.
f)    Assess the capacity of Nigerian banks risk management process to provide for close analysis and monitoring of the dynamics in the operating environment with a view of evaluating their impact on the banks past, present and future risk trends.
g)    Identify shortcomings and suggest corrective measure to the banks’ risk management process in a bid enhance the banks’ overall quality.
1.4    THE RESEARCH HYPOTEHSIS
    In reflection of the possible relationship of factors causing and/or enhancing risks as well as those being affected by risk, t he following inferences are thus noteworthy;
HA:    Inadequate management of banks risk is responsible for financial crisis in an economy.  
HO:    Inadequate management of banks risk is not responsible for financial crisis in an economy.  
HA:    Inadequate prudential regulations from government authorities necessitate banks risk consequences.  
HO:    Inadequate prudential regulations from government authorities do not necessitates banks risk consequences.  
1.5    SIGNIFICANCE OF THE STUDY
    Moye (2003) in reflection of the unoveremphasizable need for concerned parties in the Nigerian banking industry to identify, assess and mitigate risk inherent in banking business and operations posits the following:
i.    The differing natures of bank risks
ii.    The variant degrees of bank risks
iii.    Measurability of bank risk through adequate assessment procedures.
iv.    Measures of mitigating bank risks effects on national and global economics respectively.
v.    The best practical of banks risks: its indulgence, safety nets optioning as is obtainable.
With this on hand, it is expected that the numerous bank failure, economic and financial crisis rocking nations and the world and Nigeria in  particular are short-lived hence, enhanced banking service quality at an abruptly reduced risk encumbrances is the focus of this study. In furthermore of the relevance of this study, exploration will be adequately given to the highlighted points above.
This study shall be relevant and useful in the following areas of bank management, financial regulation by necessary regulatory authorities, economic management et cetera hence, bank management and staff, CBN, and offices of financial and economic planning of states, and federal government and as well agents of financial transactions. All these and sundry will find the work more than useful in their obligations.
1.6      SCOPE AND LIMITATIONS OF THE STUDY
    This study in its bid to affect its reality focuses firstly on the Nigerian banks with particular interest in First Bank of Nigeria Plc, a fore leading bank in the country especially for its risk management and risk disclosure. Moreos, the study is directed to utilize extensively the information from the annual report of First Bank Nigeria Plc in 2009 as well as its publication on risk management disclosure in 2009. In addition, this study explores the possible dimensions of risk evident in Nigerian banks and their peculiarity.
    Despite the rigorous work carried out on this salient issue in Nigerian banks, this study as presented lends to be bedeviled by some sort of shortcomings that necessitate limitations on the level of accuracy, adequacy and reliability. These short comings include:
a.    The use of one bank as a case study not withstanding the high pedigree of first bank of Nigeria Plc in the industry which aids the drawing of a reasonably fair inference from this work on risk management systems in Nigerian Banks.
b.    The inadequacy of relevant literature as well as inappropriate documentation of data thus, adding to the inefficiency of data generation. These weaknesses however, are seen to be occasioned to this degree by time and financial constraints literature and inevitable in the course of carrying out this study.