Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Risk Management and Project Appraisal in Nigerian Banking Industry - Theory versus Reality

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Risk Management and Project Appraisal in Nigerian Banking Industry - Theory versus Reality

Article excerpt

Abstract

One of the major tasks being faced by the management of corporations is how to make optimum investments decisions. These decisions are surely not without their associated risks. The purpose of this paper is to investigate whether Nigerian banking firms practically take risk analysis into consideration when appraising their investments as compared to what exist in finance literature, and examine some risk analytical methods being used by management teams of firms and how the use has affected the firms' investment performance. Primary data were collected through the use of questionnaires served to workers of 5 banks representing the sample selected out of the Nigerian banks. The data were analyzed using the simple percentages and chi - square (x2) to test the two hypothesis formulated for the study. It was observed from the findings that Nigerian banks make use of risk analytical techniques in their investment appraisal. It was also discovered that some risk analytical techniques are more popular in use than others among the users and that effective evaluation of risk plays a major role in enhancing investment performance. It is therefore recommended among others that: workers at management level should be educated on the importance of risk evaluation techniques in order to maximize returns on their shareholders investment. Also to be more dynamic in the use of various risk analytical methods depending upon the conditions so as to guarantee high returns.

Keywords: risk, investment, certainty equivalent, expected value, utility value

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In finance theory, it is becoming increasingly acceptable that firms should take risk analysis into consideration in their investment appraisal. Despite the difficulties incurred in accurately accessing business risk, the broad principles, associated with risk analysis can be of great help to business in forming overall strategy and optimizing returns. Making optimum investment decision therefore is one major goal of financial management in modern times. This involves efficient allocation of capital and firm's decision to commit its funds in long term assets and other profitable activities. This decision is considered very significant since it tends to influence the firm's wealth, determine its size, set the pace and direction of its growth and affects its business risk. Risk in relation to project appraisal is an uncertainty or probability of realizing the future returns or values of a project (Richard A.B and Stewart C.M,1996). The riskiness of an investment project is indicated by the level of an investment decision a risk averse investor, who wants more returns and less risk will embark upon through a well diversified portfolio.

The evaluation of an investment project starts with the principle that its profitability is measured by the rate of return we expect to receive from it over some future period. For this reason, we cannot calculate the rate of return realistically unless we take into account.

a. when the sums involved in an investment are spent; and

b. when the returns are received

Pandey (2004) asserts that comparing alternatives investment is thus complicated by the fact that they usually differ not only in size but also in the length of time over which expenditures will have to be made and benefits returned. These shortcomings therefore do stimulate decision-makers to explore more precise methods for determining whether one investment would leave a company better off in the long run than would another course of action, therefore the objectives of this paper are

- to access how the various risk analytical techniques are being applied in real life situation.

- to examine the effect of risk exposure on the investment performance of banking firms and

- to recommend possible ways of managing risks of investment decisions more efficiently in Nigerian firms. …

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