Risk Management and Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

The study examined the effect of risk management on the financial performance of Deposit Money Banks in Nigeria. The study employed ex-post-facto research design. The study population consisted of 26 DMBs from which 10 were selected using purposive sampling technique. Secondary data were collected from financial statements. Panel data regression was used to estimate the parameter coefficients. Findings revealed that Debt Equity Ratio, Asset Liability Maturity Mismatch and Capital Adequacy Ratios had significant negative, positive and negative effects on Return on Assets respectively. Loan Deposit Ratio and Type of Auditor had significant negative and positive effects on Return on Equity respectively. Also, Interbank Funding Ratio had significant positive effect on Return on Equity. Risk Asset Portfolio of the DMBs was reasonably diversified with diversification index above 0.6. Capital adequacy ratio of the DMBs averaged 0.22. The study concluded that the effective risk management among the DMBs impacted their financial performance positively. The study recommended that DMBs should determine their optimum loan-deposit mix as well as pay special attention to their balance sheet mismatch to determine the most appropriate bounds of tenors between deposit and risk assets. Also, the Central Bank of Nigeria should bring down the cash reserve ratio that restricts credit creation and causes high cost of funds. The Central Bank of Nigeria should also pay interest rate on cash reserves held by the bank.