The study examines the relative effect of risk management and corporate governance on bank performance in Nigeria. The study utilizes both primary and secondary data. The primary data were collected using structured questionnaire that were administered in Four-hundred and eighty (480) employees of Wema Bank Plc in Nigeria. The subjects were randomly selected from Head Office and Osun State regional branches across the various departments, while annual financial reports for the year ended 2008 and 2009 were used as secondary data. Financial ratios were computed for analysis on data.
The study reveals that there is a positive relationship between risk management and bank performance. That effective risk management and corporate governance enhance bank profitability and performance. Further, that bank performances depend largely on risk management and corporate governance. Also better corporate governance lead to better risk management.
It was concluded that risk management has significant effect on bank performance and profitability.
Key words: Risk Management, Corporate Governance, Performance, Empirical Evidence and Nigerian Banking Industry.
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Risk management is the process by which managers satisfy their needs by identifying key risks, obtaining consistently understandable, operational risk measures, choosing which risks to reduce and which to increase and by what means, and establishing procedures to monitor the resulting risk position.
The danger of capital misallocation and imprudent risk taking has become the leading source of problem in Nigeria banking industry, which has crippled some banks in Nigeria. There is need for bankers to be aware of the need to identify, measure, monitor and control all inherent risks in their day to day business transactions. They need to determine that they hold adequate capital against these risks.
Since inadequate risk management arising from lax corporate governance is core problem to most banks in Nigeria, thus a need arise that banks and other financial institution need to meet requirements for risk measurement and capital adequacy and reduce conflict between managers and shareholders which could harm the firm value in the short and long run. The business managers need reliable risk measures to direct capital to activities with the best risk/ reward ratios. They need the estimate of the size of potential losses to stay within limits imposed by readily available liquidity, provided by depositors, customers, creditors and regulators with a mechanism to monitor risk position and create incentives for prudent risk taking by division and individual. The identification of this and resulting consequences on bank performance has prompt this empirical research study.
The general objectives of the study is to ascertain the effect of risk management and corporate governance on bank performance, while the specific objectives are to determine the relationship between risk management and bank performance and to assess the impact of risk management and corporate governance on bank profitability and performance.
The narrow approach of corporate governance views the subject as the mechanism, through which shareholders are assured that managers will act in their interests. Shleifer and Vishny (1997) defined corporate governance as the methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment. Macey and O'Hara (2001) argue that a broader view of corporate governance should be adopted in the case of banking institutions. They also argue that because of the peculiar contractual form of banking, corporate governance mechanisms for banks should encapsulate depositors as well as shareholders.
In general, the literature on bank regulation emphasizes the stated purpose of regulation as that of maintaining the integrity of the market system. …