RISK MANAGEMENT AND PROFITABILITY IN NIGERIAN BANKS

Abstract

The adoption of credit risk management is becoming a crucial factor for every deposit money bank around the world. The objective of this study was to establish the effect of risk management on profitability of deposit money banks (DMB) in Nigeria. This study was primarily based on secondary data which were collected from eight (8) out of the twenty two (22) deposit money banks in Nigeria that formed the sample of the study. The sample was selected from the population based on superior financial performance for the period 2009 to 2014 and the availability of consistent data over the set period. Panel data model of a six year period from 2009 to 2014 from the selected banks was used to examine the relationship between risk management and profitability. Descriptive analysis of data collected was done using Statistical data analysis (STATA) software. Percentages were also used to ascertain the proportion of income used to make provision for bad loans while the effect of staff training on risk management was measured with relationship between training cost and net interest income. Findings revealed that banks with good credit risk management have better performance. A positive relationship exists between credit risk management and profitability when measured by return on equity (ROE) and return on assets (ROA). The average return on asset was 9% and the average value for return on equity was 18%. The result shows that non-performing loans and provisions have an adverse impact on profitability with negative 0.1451 Non performing loan (NPL) and negative 0.1452NPL on ROA and ROE respectively. It was also revealed from the findings that bad loan provision eat deep into profit in Nigerian DMB. Lastly staff training cost has a positive effect on risk management; training cost has 164% effect on returns on equity and 94% on returns on asset of the selected DMB. The work concludes that risk management positively affects profitability of Nigerian deposit money banks and therefore recommended that banks should implement effective tools and techniques to reduce credit risk in Nigerian DMB.