THE IMPACT OF RISK MANAGEMENT ON PROFITABILITY OF GT BANK

CHAPTER ONE

INTRODUCTION

1.1   Background
of the Study

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. However in the recent past, commercial banks in Nigeria witnessed
rising non-performing credit portfolios and these significantly contributed to
the financial distress in the banking sector.

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. This is the reasons why lending is based on the two
fundamental products of banking: money and information. 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 aspect 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 a deterioration in the credit standard of a bank’s counterparties.

 Hence, the need to investigate the subject
matter of this research becomes imperative.

1.2   Statement
of the Problem

Commercial banks in the recent past
witness rising non-performing credit portfolios sequel to the inability of
their management to effectively manage risk and credit administration. That
problem resulted to high bad debts in commercial bank and a number of other
commercial banks were classified as distressed banks by the monetary
authorities.

Consequently, the need to examine the
subject matter: An Assessment of risk management and credit administration in
Union Bank Plc, Kaduna Main branch becomes worthy of investigation. 

1.3   Research
questions

In order to
actualize the objectives of this research, the following research questions was
formulated to guild this study:

1)               
What are the Methods of Risk
Management in GT Bank Plc?

2)               
How is Credit administered in
GT Bank Plc?

3)               
What are the constraints of
Risk Management and Credit Administration in GT Bank Plc?

1.4   Objectives
of the Study

The central objective of the study is
to assess the impact of risk management on the profitability of GT Bank Plc, Murtala
Mohammed Square Branch, Kaduna. The specific objectives are:

1.     To find out the method of risk management
used in GT Bank Plc.

2.
    To identify to how credit is
administered in GT Bank Plc.

3.
    To identify the constraints militating
against risk management and credit       administration
in GT Bank Plc.

1.5   Statement of Hypothesis

1.     H0:     Effective
credit risk management is not a strong determinants of banks profitability

        H1:Effective
credit risk management is a strong determinants of banks       profitability

2.     H0 Poor credit risk management does
not lead to bank distress.

        H1
poor credit risk management lead to bank distress.

3.     H0
risk management does not enhances the performance of banks in terms of       profitability.

        H01 risk management enhances
the performance of banks in terms of     profitability.

1.4   Significance
of the Study

This study will be beneficial to
financial institution especially GT Bank Plc, as they utilize the finding of
this study as a basis for policy formulation regarding risk management and
credit administration in Banks. The shareholders, stakeholders and the entire
society will benefit from this study.

1.6   Scope of
the Study

To this end, the study will examine which
is the best way to manage risk in GT Bank Plc, Murtala Mohammed Square branch,
Kaduna. The branch manager, other staff and customers of the branch are to be
questioned in the course of the study

1.7   Definition
of Terms

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

2.     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.

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

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

5.     Business Risk: This
refers to variability in cash flow.

6.     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.