Financial Crime World

RISK MANAGEMENT PRACTICES IN ETHIOPIAN COMMERCIAL BANKS: A REVIEW

Introduction

In today’s highly competitive and rapidly changing banking landscape, risk management has become a crucial aspect of banking operations. Ethiopian commercial banks are no exception, as they face various types of risks that can impact their financial performance.

Types of Risks in the Banking Sector

A recent study conducted by the National Bank of Ethiopia (NBE) revealed that the banking sector in Ethiopia is exposed to several types of risks, including:

  • Liquidty Risk: The risk of not having sufficient funds to meet short-term obligations.
  • Interest Rate Risk: The risk of changes in interest rates affecting a bank’s profitability.
  • Credit Risk: The risk of borrowers defaulting on their loans.
  • Operational Risk: The risk of failures or disruptions to an institution’s operations, such as technology failures or human error.
  • Strategic Risk: The risk of poor business decisions or lack of competitiveness in the market.
  • Reputational Risks: The risk of damage to a bank’s reputation, which can lead to loss of customers and revenue.

Review of Existing Literature

While some studies have focused on financial risks associated with banking operations, there is a growing need for research on non-financial risks, such as strategic and reputational risks. A review of existing literature on risk management practices in Ethiopian commercial banks reveals that most studies have focused on:

  • Credit Risk Management: The study by Zerga (2016) assessed the credit risk management practices at NIB International Bank S.C.
  • Liquidity Risk Management: The study by Mulat (2014) examined the liquidity risk management practices at Wegagen Bank S.C.
  • Operational Risk Management: Several studies have focused on operational risk management in Ethiopian commercial banks.

However, these studies have also identified several weaknesses in risk management practices in Ethiopian commercial banks, including:

  • Lack of Capacity: Many banks lack capacity in understanding risk management policies and procedures (Ayalew, 2014).
  • Negative Impact on Performance: Credit risk management and operational risk management have been found to have a negative impact on bank performance (Ephream, 2016).

Areas for Improvement

The findings of existing studies have identified the need for:

  • Better Risk Assessment and Analysis: Risk assessment and analysis had a significant effect on risk management (Nigussie, 2016).
  • More Effective Risk Monitoring and Evaluation: Liquidity risk management practices are limited by reliance on seasonal fluctuations in sources of funds (Tibebu, 2017).

Study Objectives

This study aims to assess the risk management practices in Ethiopian commercial banks, including both financial and non-financial risks. The study will also examine the challenges faced by these banks in managing their risks and identify areas for improvement.

Expected Contribution

The findings of this study are expected to contribute to the development of effective risk management practices in Ethiopian commercial banks, ultimately enhancing the stability and profitability of these institutions.