Abstract

Deposit Money Banks (DMBs) face formidable challenges in order to operate profitably. As business entities poised to maximise shareholders’ wealth, they need to grow their revenue while at the same time keep their cost of funds as low as possible. The threats to achieving this come from the mandatory cash reserve ratio that restricts reasonable chunk of deposits from being invested, and their attempt to build-up deposit portfolio that tilts more towards non-interest paying demand deposit. Since the most profitable assets of the DMBs are the loans and advances, the booking of these risk assets for credit worthy customers who will meet maturing obligations as at when due, constitutes the greatest task to management. This paper is a study to determine how effective risk management practices have been among the DMBs in the Nigerian financial services sector. Survey research design was employed. The study population consisted of twenty-six (26) DMBs from which 10 were selected using purposive sampling technique. The primary data were obtained through a validated structured questionnaire. Reliability of the instrument was assessed, yielding Cronbach’s Alpha coefficients for the constructs that ranged between 0.818 and 0.873. The collected data were analysed using Relative Importance Index (RII) and Mean Score Index. Findings revealed that risk management practices were effective among the DMBs in Nigeria with RII of the 7 segments in the risk management practices above 0.80. The board of directors’ involvement came highest with 0.90. The use of loan syndication came last with 0.82 within the risk management strategy segment. The study concluded that the active interest of the board of directors in the risk management practices contributed immensely to the effectiveness among the DMBs. The study recommends that the Central Bank of Nigeria should bring down the cash reserve ratio that restricts credit creation and causes high cost of funds, and also pay interest rate on cash reserves held by the bank.

Highlights

  • The financial services industry, especially Deposit Money Banks (DMBs) act as a catalyst in the system of evolvement which serves as the willpower of economic advancement and prosperity thereby inculcating the culture of savings and funds mobilization from several small households and business firms across large area of coverage [2]

  • The research [24] highlighted two major roles performed by banks in their intermediation process as creating liquidity and transforming risk; and these twin roles impact on the larger economy by stimulating growth in the real sector

  • The essential quality and nature of the respondents are revealed by the demographic factors and this is reflected in their different views and assessment of elements in the questionnaire

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Summary

Introduction

The financial services industry, especially Deposit Money Banks (DMBs) act as a catalyst in the system of evolvement which serves as the willpower of economic advancement and prosperity thereby inculcating the culture of savings and funds mobilization from several small households and business firms across large area of coverage [2]. Banking Financial Institutions, especially Deposit Money Banks intermediate between the surplus and deficit sectors in the economy thereby promoting savingsinvestment process, capital formation and real growth of the economy [1]. The study [27] opined that through their intermediation duty, banks enhance formation of capital, production process and economic growth. The research [24] highlighted two major roles performed by banks in their intermediation process as creating liquidity and transforming risk; and these twin roles impact on the larger economy by stimulating growth in the real sector. International Journal of Academic Research in Business and Social Sciences, Vol 3, No 2, February

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