Research Article

Effect of Risk Management on Financial Performance of Listed Deposit Money Banks in Nigeria

Ahmed Abdullahi Ibrahim1*, Haruna, Mohammed Aris1
1 Department of Business Administration, Nasarawa State University, Keffi
* Corresponding author: ibrahimahmedabdullahi@nsuk.edu.ng
Published: Jun, 2024
DOI: 10.67894/bjms.2024.r8zz8q8q
Pages: 138-165

Abstract

This study examined the effect of risk management on the financial performance of listed deposit money banks in Nigeria. The study used an ex post facto design, targeting 19 listed deposit money banks in Nigeria as of 31st December 2022. A sample of 14 banks was purposively selected, meeting the criteria of being listed before 31st December 2014 and having complete annual reports for the 2014-2023 period. Descriptive statistics and regression analysis were used to analyze the data obtained. The study found that, credit risk has positive but insignificant effect on the financial performance of the listed deposit money banks in Nigeria. While, interest risk and liquidity risk have positive and significant effect on financial performance of deposit money banks in Nigeria. The study concluded that risk management influence financial performance of listed deposit money banks in Nigeria. The study therefore study recommends among others deposit money banks in Nigeria should improve on their credit risk management practice by way of implementing effective credit assessment, monitoring, and recovery mechanisms to minimize the impact of credit risk on their financial performance. They should also focus on diversifying their loan portfolios, setting appropriate credit limits, and strengthening their credit risk modeling and analysis capabilities to enhance their resilience to credit-related shocks. 

Keywords

Credit Risk Deposit Money Banks Financial Performance Interest Risk Liquidity Risk Return on Assets Risk Management Nigeria

References

  1. Abiola, I., & Olausi, A. S. (2014). The impact of credit risk management on the commercial banks' performance in Nigeria. International Journal of Management and Sustainability, 3(5), 295-306. https://doi.org/10.18488/journal.11/2014.3.5/11.5.295.306
  2. Abu-Rummana, Y., Al-Sharif, I., & Al-Majali, A. (2021). The impact of risk management on financial performance of banks in Jordan. International Journal of Financial Studies, 9(4), 62. https://doi.org/10.3390/ijfs9040062
  3. Acharya, V. V., & Mora, N. (2015). A crisis of banks as liquidity providers. The Journal of Finance, 70(1), 1-43.
  4. Achieng, L. D., Muturi, W. & Ngaba, D. (2018). Effect of financial performance on the growth of small and medium enterprises in Kisumu County, Kenya. International Journal of Social Sciences and Information Technology, 4(3), 1-13
  5. Adebiyi, J. A. (2020). Impact of interest rate on economic growth in Nigeria. Journal of Economics and Sustainable Development, 11(10), 23-30.
  6. Adeusi, S. O., & Ojo, S. A. (2016). The impact of risk management on financial performance of banks in Nigeria. International Journal of Economics and Financial Issues, 6(3), 879-885.
  7. Adeusi, S. O., Akeke, N. I., Adebisi, O. S., & Oladunjoye, O. (2014). Risk management and financial performance of banks in Nigeria. European Journal of Business and Management, 6(31), 336-342.
  8. Afolabi, A. A., Akinbode, S. O., & Idowu, A. M. (2020). Credit risk management and financial performance of commercial banks in Nigeria. Journal of Finance and Accounting, 8(1), 1-9.
  9. Agboola, A. A., Adebayo, A. A., & Eze, N. (2022). Interest rate risk and financial performance of banks in Nigeria. Journal of Banking and Finance, 45(3), 123-135.
  10. Agha, S. (2020). Impact of working capital management on profitability: Evidence from the cement sector of Pakistan. Journal of Accounting and Finance, 20(1), 41-56.
  11. Agostini, L., Nosella, A., & Filippini, R. (2020). Does intellectual capital allow improving innovation performance? A quantitative analysis in the SME context. Journal of Intellectual Capital, 21(3), 441-463
  12. Agostini, L., Nosella, A., & Filippini, R. (2020). The impact of financial performance indicators on firm competitiveness. European Journal of Business Research, 28(2), 55-72. https://doi.org/10.1016/j.ejbr.2020.02.001
  13. Akani, H., & Swenem, A. (2019). Return on assets as a performance indicator in financial institutions. Journal of Banking and Finance Research, 12(1), 101-115. https://doi.org/10.1234/jbfr.2019.0012
  14. Akter, N., Hasan, M., & Rahman, M. (2021). Impact of financial metrics on firm performance: Evidence from emerging markets. International Journal of Finance and Accounting, 19(4), 432-447. https://doi.org/10.1016/j.ijfa.2021.08.010
  15. Al-Abduljader, S. (2018). Interest rate risk management in Islamic banks. Journal of Economic and Administrative Sciences, 34(2), 128-142.
  16. Alijarde, M. I. B., & González, L. G. (2019). The impact of intellectual capital on financial performance in the context of the tourism sector. International Journal of Environmental Research and Public Health, 16(23), 4708.
  17. Alim, W., Ali, A., & Metla, M. R. (2023). The effect of liquidity risk management on financial performance of commercial banks in Pakistan. Journal of Applied Economics and Business, 9(4), 109-128.
  18. Aljalbani, A. M. (2020). The impact of interest rate risk on the financial performance of Islamic banks in the Gulf Cooperation Council countries. Journal of Islamic Accounting and Business Research, 11(3), 629-646.
  19. Al-Mamari, Q., Al-Samawi, A., Al-Akhzami, M., & Al-Kharusi, H. (2022). The effect of capital risk management practices on the financial performance of listed banks in Oman. Journal of Financial Risk Management, 11(2), 187-200. https://doi.org/10.4236/jfrm.2022.112011
  20. Almustapha, A., Atan, R., & Nordin, N. (2020). The impact of risk management practices on financial performance: Evidence from listed commercial banks in Nigeria. International Journal of Economics and Financial Research, 6(1), 1-10. https://doi.org/10.32861/ijefr.61.1.10
  21. Al-Slehat, Z. (2022). Effect of interest rate risk on financial performance the mediating role of banking security degree: evidence from the financial sector in Jordan. Business: Theory and Practice,1(1). https://doi.org/10.3846/btp.2022.13884.
  22. Aon. (2020). Global Risk Management Survey. Aon.
  23. Aregbesola, O. D., Wright, O., Kolawole, I. T., & Omojola, S. O. (2024). Impact of liquidity risk and leverage on the financial performance of Nigerian deposit money banks. Journal of Economics and Finance Management Studies, 7(8), 4867-4875. https://doi.org/10.47191/jefms/v7-i8-10
  24. Aryal, K. (2023). Effect of credit risk on financial performance of commercial banks in Nepal. The Journal of Asian Finance, Economics and Business, 10(2), 161-171
  25. Aven, T. (2016). Risk assessment and risk management: Review of recent advances on their foundation. European Journal of Operational Research, 253(1), 1-13.
  26. Ayodeji, O. A., & Adebayo, S. T. (2023). Impact of risk management practices on the financial performance of Nigerian banks. Journal of Financial Risk Management, 12(2), 120-135. https://doi.org/10.4236/jfrm.2023.122010
  27. Ballester, L., Ferruz, L., & González, V. M. (2016). Interest rate changes and stock returns in Spain: A wavelet analysis. BRQ Business Research Quarterly, 19(4), 238-252.
  28. Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the Economics of Finance (Vol. 1, Part B, pp. 1053-1128). Elsevier.
  29. Begenau, J., Piazzesi, M., & Schneider, M. (2015). Banks' risk exposures. National Bureau of Economic Research.
  30. Belinda, R., & Irawati, Z. (2024). The effect of interest rate risk on financial performance with the mediating variable of banking security level. Journal La Sociale, 5(1), 242-251. https://doi.org/10.37899/journal-lasociale.v5i1.1061
  31. Bello, M. A. & Umar, K. (2019). Credit Quality and Financial Performance of Deposit Money Banks in Nigeria. Bayero Journal of Management Sciences, Vol. 2.
  32. Bellotti, T., & Crook, J. (2012). Loss given default models incorporating macroeconomic variables for credit cards. International Journal of Forecasting, 28(1), 171-182.
  33. Bemshima, B. E., Nkuma, U. L., & Ademu, J. A. (2022). Impact of interest rate on the financial performance of listed manufacturing firms in Nigeria. Accounting, 8(3), 437-444. https://doi.org/10.5267/j.ac.2022.3.001.
  34. Berger, A. N., & Bouwman, C. H. (2017). Bank liquidity creation, monetary policy, and financial crises. Journal of Financial Stability, 30, 139-155.
  35. Bhattarai, Y. R. (2016). Effect of credit risk on the performance of Nepalese commercial banks. Journal of Nepalese Business Studies, 9(1), 9-16. https://doi.org/10.3126/jnbs.v9i1.12995
  36. Bonner, C., van Lelyveld, I., & Zymek, R. (2015). Banks' liquidity buffers and the role of liquidity regulation. Journal of Financial Services Research, 48(3), 215-234.
  37. Brustbauer, J. (2016). Enterprise risk management in SMEs: Towards a structural model. International Small Business Journal, 34(1), 70-85.
  38. Castagna, A., & Fede, F. (2013). Measuring and managing liquidity risk. John Wiley & Sons.
  39. Chen, W., Chen, Y., & Huang, S. (2021). Liquidity risk and bank performance during financial crises. Journal of Financial Stability, 56, 100906. https://doi.org/10.1016/J.JFS.2021.100906..
  40. Chipa, C. C., & Wamiori, C. (2017). Effects of risk management on financial performance of insurance companies in Mombasa County, Kenya. Journal of Economics and Business, 5(2), 56-71.
  41. Chowdhury, M. A., & Rasid, M. (2017). Financial efficiency and firm performance: A study on return on investment. Journal of Financial Studies, 15(3), 245-262. https://doi.org/10.1007/s1034-017-0209-2
  42. Chuke, N. F., & Kenneth, O. E. (2018). Effect of corporate governance on the financial performance of quoted manufacturing firms in Nigeria. International Journal of Academic Research in Accounting, Finance and Management Sciences, 8(3), 26-36.
  43. Claessens, S., & Kodres, L. (2014). The regulatory responses to the global financial crisis: Some uncomfortable questions. IMF Working Paper, WP/14/46.
  44. Crouhy, M., Galai, D., & Mark, R. (2014). The essentials of risk management (2nd ed.). McGraw-Hill Education.
  45. Dionne, G. (2013). Risk management: History, definition, and critique. Risk Management and Insurance Review, 16(2), 147-166.
  46. Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), 3295-3317.
  47. Drehmann, M., & Nikolaou, K. (2013). Funding liquidity risk: Definition and measurement. Journal of Banking & Finance, 37(7), 2173-2182.
  48. Ekanayake, E. M. N. N., & Azeez, A. A. (2015). Determinants of non-performing loans in licensed commercial banks: Evidence from Sri Lanka. Asian Economic and Financial Review, 5(6), 868-882.
  49. Eke, G. J., & Osagie, E. E. (2019). Credit risk management and bank performance in Nigeria: A study of selected deposit money banks. European Journal of Accounting, Auditing and Finance Research, 7(4), 59-77.
  50. Ene, E. O. Ogbulu, O. M. & Ibe, I. G. (2015). Risk management practices and financial performance in the Nigerian banking sector. Journal of Economics and International Business Management, 3(2), 23-32.
  51. Fabozzi, F. J. (2012). Fixed income analysis (3rd ed.). John Wiley & Sons.
  52. Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2017). Efficiency and risk in European banking. Journal of Banking & Finance, 35(5), 1315-1326.
  53. Frigo, M. L., & Anderson, R. J. (2011). Strategic risk management: A foundation for improving enterprise risk management and governance. Journal of Corporate Accounting & Finance, 22(3), 81-88.
  54. Fungáčová, Z., & Weill, L. (2013). Does competition influence the bank failure decision? Journal of Banking & Finance, 37(9), 2605-2615.
  55. Glennon, D., & Nigro, P. (2005). Measuring the default risk of small business loans: A survival analysis approach. Journal of Money, Credit and Banking, 37(5), 923-947.
  56. Hasan, I., & Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(2), 163-200.
  57. Hasan, M. M., Hossain, M., Cheung, A., & Habib, A. (2020). Corporate social responsibility, bank distress, and financial stability: Evidence from Asian banks. International Review of Economics & Finance, 67, 161-178.
  58. Hempel, G. H., & Simonson, D. G. (2019). Bank management: Text and cases. John Wiley & Sons.
  59. Holmström, B., & Tirole, J. (1998). Private and public supply of liquidity. Journal of Political Economy, 106(1), 1-40.
  60. Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.
  61. Jayathilake, P. M. B. (2012). Risk management practices in small and medium enterprises: Evidence from Sri Lanka. International Journal of Multidisciplinary Research, 2(7), 226-234.
  62. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
  63. Jiang, L., Tang, N., & Sherraden, M. (2019). Financial capability and economic outcome in low-income households: The mediating role of asset ownership. Journal of Consumer Affairs, 53(2), 354-381.
  64. Johnson, M. L., & Smith, R. A. (2023). The role of risk management in enhancing bank performance: Evidence from African emerging markets. International Journal of Banking and Finance, 29(1), 78-95. https://doi.org/10.1016/j.jbankfin.2023.105489
  65. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.
  66. Khan, M. H., & Khan, M. A. (2018). Interest rate risk management in commercial banks of Pakistan. South Asian Journal of Management, 25(1), 7-23.
  67. Khasawneh, A. Y., & Momani, R. A. (2020). The effect of interest rate risk on the financial performance of Jordanian commercial banks. Banks and Bank Systems, 15(1), 189-198.
  68. Kipngetich, M. C., & Muturi, W. (2015). Effect of credit risk management on financial performance of savings and credit co-operative society in Kenya. International Journal of Economics, Commerce and Management, 3(3), 1205-1213.
  69. Kodithuwakku, S. (2015). Impact of credit risk management on the performance of commercial banks in Sri Lanka. International Journal of Scientific Research and Innovative Technology, 2(7), 1-9.
  70. Kumshe, H. M, Bamanga, U. & Salihu, A. M. (2024). Effect of risks management on the financial performance of listed deposit money banks in Nigeria. Journal of Economics, Management and Trade 30 (4):27-36. https://doi.org/10.9734/jemt/2024/v30i41202
  71. Lalonde, C., & Boiral, O. (2012). Managing risks through ISO 31000: A critical analysis. Risk Management, 14(4), 272-300.
  72. Lam, J. (2014). Enterprise risk management: From incentives to controls. John Wiley & Sons.
  73. Malik, M. S. (2020). The impact of corporate governance on the financial performance of Pakistani firms. Asian Economic and Financial Review, 10(3), 321-331.
  74. Manzaneque, M., Priego, A. M., & Merino, E. (2021). Corporate governance effect on financial distress likelihood: Evidence from Spain. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 50(1), 27-54.
  75. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.
  76. Maudos, J., & Fernández de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking & Finance, 28(9), 2259-2281.
  77. Miao, H., Ramchander, S., Wang, T., & Yang, J. (2017). Informational roles of credit default swap markets: Evidence from the United States and Europe. Journal of Financial and Quantitative Analysis, 52(2), 577-601.
  78. Miller, M. H., & Modigliani, F. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297.
  79. Moudud-Ul-Huq, S. (2018). Risk management and the financial performance of commercial banks in Bangladesh. Journal of Business and Management, 20(1), 38-45.
  80. Munangi, E., & Sibindi, A. (2020). An empirical analysis of the impact of credit risk on the financial performance of South African Banks. Academy of Accounting and Financial Studies Journal, 24, 1.
  81. Mushafiq, M., Sindhu, M., & Sohail, M. (2021). Financial performance under influence of credit risk in non-financial firms: evidence from Pakistan. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/JEAS-02-2021-0018.
  82. Nawaiseh, M. E. (2022). The impact of earnings management on financial performance of Jordanian industrial companies. Accounting and Finance Research, 11(1), 72-83.
  83. Nwosu, O. (2019). Bank-specific determinants of liquidity in the Nigerian banking sector. Journal of Finance and Banking Studies, 8(3), 1-13.
  84. Nwude, C., & Okeke, C. (2018). Impact of capital structure on financial performance: Evidence from Nigerian brewers. International Journal of Economics and Financial Issues, 8(4), 342-352.
  85. Nyanyuki, K. N., Wanjiku, J. W., & Murimi, R. (2022). Effect of credit risk management on financial performance of commercial banks in Kenya. Journal of Business and Management, 24(3), 1-10.
  86. Ogunbiyi, A. A., & Ihejirika, E. (2023). The impact of interest rate fluctuations on the stability of Deposit Money Banks in Nigeria. International Journal of Finance and Banking Studies, 12(1), 45-59.
  87. Olarewaju, O. M., & Adeyemi, A. A. (2015). Impact of liquidity management on the performance of Nigerian banks. Journal of Economics and Sustainable Development, 6(14), 1-10.
  88. Olatunji, O. C., & Ahmadu, I. B. (2019). Effect of risk management on the financial performance of listed deposit money banks in Nigeria. International Journal of Economics and Financial Issues, 9(3), 188-197.
  89. Oliva, F. L. (2016). A maturity model for enterprise risk management. International Journal of Production Economics, 173, 66-79.
  90. Onyango, P., & Kalunda, E. (2023). Interest rate risk and financial performance of investment banks in Kenya. Kabarak Journal of Research & Innovation, 13(3), 65-70.
  91. Poudel, R. P. S. (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of Arts and Commerce, 1(5), 9-15.
  92. Ramazan, A., & Gulden, U. (2019). The effect of credit risk management on the financial performance of banks: Evidence from Turkey. Journal of Finance and Bank Management, 7(1), 11-20. https://doi.org/10.15640/jfbm.v7n1a2
  93. Ratemo, S. K. (2021). Liquidity risk and financial performance of commercial banks in Kenya (Master's thesis, Kenyatta University).
  94. Saunders, A., & Cornett, M. M. (2014). Financial institutions management: A risk management approach (8th ed.). McGraw-Hill Education.
  95. Saunders, A., & Cornett, M. M. (2018). Financial markets and institutions. McGraw-Hill Education.
  96. Saunders, A., & Cornett, M. M. (2020). Financial institutions management: A risk management approach (10th ed.). McGraw-Hill Education.
  97. Selma Mokni, R. B., Rachdi, H., Ben-Ammou, S. F., & Hind Boutti, R. (2018). The determinants of the profitability of the Tunisian banks in the post-revolution era. International Journal of Economics and Financial Issues, 4(3), 612-622.
  98. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
  99. Siddiqui, A. (2015). Financial contracts, risk and performance of Islamic banking. Managerial Finance, 34(10), 680-694.
  100. Sironi, A. (2017). Risk management and regulation in banking: Balancing the impacts. Journal of Financial Regulation and Compliance, 25(4), 385-402. https://doi.org/10.1108/JFRC-01-2017-0005
  101. Smith, L., & Johnson, P. (2023). Financial metrics and firm performance: A study of asset efficiency in the corporate sector. Journal of Financial Analysis and Management, 28(2), 145-162. https://doi.org/10.1016/j.jfam.2023.02.005.
  102. Sulaiman, M., & Mohammed, Z. (2022). The impact of credit risk management on the performance of commercial banks in Nigeria. Journal of Banking and Financial Dynamics, 11(2), 134-145.
  103. Suleiman, A., Aliyu, M. S. & Bello, M. A. (2021). Market Orientation Dimensions and Firm Financial Performance: The Role of Perceived Environmental Dynamism. Nigeria Journal of Business Administration, 19 (1)1-21. Available online @ www.njba.uniben.edu.org.ng
  104. Taleb, N. N. (2007). The black swan: The impact of the highly improbable. Random House.
  105. Taran, Y., Boer, H., & Lindgren, P. (2020). A business model innovation typology. Decision Sciences, 51(1), 65-106.
  106. Tasmin, R., & Muazu, A. (2017). The role of risk management in enhancing organizational performance: A conceptual framework. International Journal of Supply Chain Management, 6(4), 197-203.
  107. Udenwa, A. T., Suberu, A. A., & Jacob, Z. (2023). Effect of liquidity risk on the financial performance of quoted deposit money banks in Nigeria. International Journal of Economics, Business and Management Research, 7(7), 54-58. https://doi.org/10.51505/IJEBMR.2023.7705
  108. Ukpong, E.G. & Essien, I. (2022). Credit risk and financial performance of quoted commercial banks in Nigeria. AKSU Journal of Administration and Corporate Governance (AKSUJACOG), 2 (4), 93-111. DOI:10.61090/aksujacog.2022.041
  109. Ullah, M., Ashraf, S., & Mirza, F. (2021). An empirical study on return on equity and firm performance in banking. Journal of Financial Performance Analysis, 34(5), 345-359. https://doi.org/10.1142/S021909151971014
  110. Yaraghi, N., & Langhe, R. G. (2011). Critical success factors for risk management systems. Journal of Risk Research, 14(5), 551-581.
How to Cite

Ibrahim, A. A., & Aris, H. M. (2024). Effect of Risk Management on Financial Performance of Listed Deposit Money Banks in Nigeria. Bayero Journal of Management Sciences, 6(2), 138-165. https://doi.org/10.67894/bjms.2024.r8zz8q8q

A. A. Ibrahim, and H. M. Aris, "Effect of Risk Management on Financial Performance of Listed Deposit Money Banks in Nigeria," Bayero Journal of Management Sciences, vol. 6, no. 2, pp. 138-165, June 2024. doi: 10.67894/bjms.2024.r8zz8q8q

Share this article:
Facebook X / Twitter LinkedIn
Download PDF View Full Text (PDF) Back to Articles