Assessing the Risk Management Practice of Commercial Banks: A case study on Hawassa

City Administration, Sidama Regional State, Ethiopia

Kanbiro Orkaido Deyganto

Lecturer and Researcher, School of Postgraduate Studies, Pharma College Hawassa Campus,
Sidama Regional State, Hawassa, Ethiopia

Abstract

Usually, the focus of the risk management practices in the banking industry is to manage an
institution's exposure to losses and to protect the value of its assets. The objective of this study
was to assess risk management practice of commercial banks operating in Hawassa City,
Sidama Regional State, Ethiopia. To this end, the researcher employed mixed research approach
with descriptive survey design. The primary data were collected from respondents who
purposively selected from commercial banks in Hawassa using structured questionnaire. Hence,
descriptive statistics analysis has been done through SPSS version 20. The finding of the study
shows that commercial banks in the city faced credit risk, liquidity risk, operational risk, interest
rate risk, and foreign exchange risk and the banks staff are familiar with risk management
practices.

Key words: Risk Management practices: Commercial Banks, Hawassa city, Sidama Regional
State, Ethiopia

1. Introduction
All businesses, whatever their size (large, medium or small), in whatever markets they operate
and no matter what products and services they provide, are constantly faced with a multiple
risks. Indeed, businesses can only prosper by successful risk taking. In banks and financial
institutions, risk considered the most important factor of earnings. Therefore, banks have to
balance the relationship between risk and return. Managing risk systematically and
professionally becomes a more important task by any business. It can be said that risk takers has
survive, effective risk managers have prosper and risk averse are likely to perish. Risk
management is a corner stone of prudent banking practice. Undoubtedly all banks in the present
day volatile environment are facing a large number of risks such as credit risk, liquidity risk,
foreign exchange risk, market risk and interest rate risk, among others- risks which may threaten
a bank’s survival and success. In other words banking is a business of risk. For this reason
efficient risk management is absolutely required.

Banks today operate in an environment marked by rising customer expectations, increasing

regulatory requirements, technological innovation and mounting competition. Hence, studying
risk management practice is an important global agenda by researchers, professionals,
academicians, and government bodies. Hence, different researchers has studied the same topic
and reached on different conclusions outside Ethiopia. For example, Leina Gabaraane (2018);
Jaiye,(2009); Christie-Veitch (2005); Bessis (2010); Adarkwa, (2011); Barjaktarović, (2009);
Rekha ,2004; Shafiq and Nasr, (2009) and Hassan, (2009) Tsion, 2015; Fasika, 2012; Atakelt
and Veni, (2015); Tibebu, (2011) has studied on risk management practice of commercial Banks
across the world and suggested that the order of importance for risk exposure that faced by banks
in are credit risk, liquidity risk, operational risk, interest rate risk, and foreign exchange risk
which ranked as first, second, third, fourth, and fifth respectively. On other hands, empirical
evidence found out good risk management boosts the overall performance of banks while poor
risk management leads to negative consequence on performance of banking business.

But, no research has been conducted in on both private and public banks existing in SNNPRS in
general and in Hawassa city in particular. This is why the researcher motivated to conduct this
research work. Therefore, this study has been assessed the risk management practice of Private
and Public Banks at SNNPRG Hawassa City. These necessity calls for an in-depth investigation
on risk management practices

2. Literature Review
2.1 Definition of Risk in Banking Environment
The Banking sector has a pivotal role in the development of an economy. It is the key driver of
economic growth of the country and has a dynamic role to play in converting the idle capital
resources for their optimum utilization so as to attain maximum productivity (Sharma, 2003). In
fact, the foundation of a sound economy depends on how sound the Banking sector is and vice
versa. In another side risk can be defined as an unplanned event with financial consequences
resulting in loss or reduced earnings (Kumar, et al, 2005).
An activity, which may give profits or result in loss, may be called a risky proposition due to
uncertainty or unpredictability of the activity of trade in future. In other words, it can be defined
as the uncertainty of the outcome. As risk is directly proportionate to return, the more risk a bank
takes, it can expect to make more money. However, greater risk also increases the danger that the
bank may incur huge losses and be forced out of business. In fact, today, a bank must run its
operations with two goals in mind – to generate profit and to stay in business (Marrison, 2005).
Banks, therefore, try to ensure that their risk taking is informed and prudent. Thus, maintaining a
trade-off between risk and return is the business of risk management. Moreover, risk
management in the banking sector is a key issue linked to financial system stability (Kumar, et
al, 005).
And also Risk defined as ‘’ a condition where there is a possibility of undesirable occurrence of a
particular result, which is known or best quantifiable and therefore insurable,‟ (Periasamy,
2008). Risk may mean that there is a possibility of loss or damage, which, may or may not
happen. Generally Risks may be deal as uncertainties resulting in adverse outcome, adverse in
relation to planned objective or expectations (Kumar et al, 2005). In the simplest words, risk may
be defined as possibility of loss. It may be financial loss or loss to the reputation/ image (Sharma,
2003).

Although the terms risk and uncertainty are often used synonymously, there is difference
between the two (Sharma, 2003). Uncertainty is the case when the decision-maker knows all the
possible outcomes of a particular act, but does not have an idea of the probabilities of the
outcomes. Banking is the intermediation between financial savers on one hand and the funds
seeking business entrepreneurs on the other hand. As such, in the process of providing financial
services, banks assume various kinds of risk both financial and non-financial. Moreover this risk
inherent in the provision of their services differs from one product or service to the other
(Adarkwa, 2011). Various writers have grouped these risks in different ways to develop the
frameworks for their analyses.

In general risk is all about uncertainty. That is inability to precisely determine what will occur in
the future, as future is full of uncertain. With regard to what is a risk Osborne (2012) has claimed
that, what we all are talking about is a future problem- or, indeed, opportunity or the potential
future effect of a decision or an action that we take now. And every decision we make or action
we take contains some element of risk. Furthermore, Osborne (2012) has indicated that,“risks
can arise as a result of our business’s activities or as a result of external factors such as
legislation, market forces, and interest or exchange rate fluctuations, the activities of others or
even the weather. They can be a product of business environment, the natural environment, and
the political or economic climate or of human inadequacies, failing or errors.
2.2 Types of Risk in Banking Sector

Risk may be defined as ‘possibility of loss’, which may be financial loss or loss to the image or
reputation. Banks like any other commercial organization also intend to take risk, which is
inherent in any business. Moreover this risk inherent in the provision of their services differs
from one product or service to the other (Adarkwa, 2011). Higher the risk taken, higher the gain
would be. But higher risks may also result into higher losses. However, banks are prudent
enough to identify measure and price risk, and maintain appropriate capital to take care of any
eventuality. The major risks in banking business are;

Figure 1. Types of Risk in Banking Sector

Banking Risk

Liquidity Risk Interest Market Risk Credit Risk Operationa

Rate l
Risk Risk

Source: Adopted from work of Adarkwa (2011) and Atakelt and P. Veni (2015).

Liquidity Risk: The liquidity risk of banks arises from funding of long-term assets by short-term
liabilities, thereby making the liabilities subject to rollover or refinancing risk (Kumar, 2005) .It
can be also defined as the possibility that an institution may be unable to meet its maturing
commitments or may do so only by borrowing funds at prohibitive costs or by disposing assets at
rock bottom prices (Kumar, et al, 005).
Interest Rate Risk: Interest Rate Risk arises when the Net Interest Margin or the Market Value
of Equity (MVE) of an institution is affected due to changes in the interest rates. It is the
exposure of a Bank’s financial condition to adverse movements in interest rates. When managing
interest rate risk, bank is obliged to align the scope and structure of assets and liabilities so as to
enable an efficient management of this risk and to establish policies and procedures for
identifying and managing these risks. The essence of managing interest rate risk is that the
exposure to interest rate risk is maintained at a certain level. Fluctuations in interest rates affect
the income, capital and the cost of banks. The most commonly used models for interest rate risk
management include (Cvetinović, 2008).
Credit Risk: Credit risk is more simply defined as the potential of a bank borrower or
counterparty to fail to meet its obligations in accordance with the agreed terms. Credit risk is the
most common cause of bank failure, and therefore credit risk management is of crucial
importance for the survival of bank business. There’s a big responsibility of bankers, mainly
those employed in credit departments, to monitor the effects of factors that can affect the quality
of the loan portfolio of the bank and to promptly respond to adverse developments that may lead
to bank bankruptcy.

Operational Risk: Basel Committee for Banking Supervision has defined operational risk as
‘the risk of loss resulting from inadequate or failed internal processes, people and systems or
from external events’. Thus, operational loss has mainly three exposure classes namely people,
processes and systems. In 2003, the Basel Committee came up with the basic practices for
managing this risk. It is believed that it is best to manage operational risks where they appear,
and the planning, coordination and monitoring should be carried out centrally by the department
for operational risk management. According to the Basel Accord, the management of this risk
should be carried out through four steps: identification, assessment, control and monitoring.
(Fabris,2006).

2.3 Risk Management practice in the Bank Industry

All Public and Private banking sectors are highly regulated industry with direct and indirect or
detailed and focused regulators. While banks struggle to keep up with the changes in the
regulatory environment, regulators struggle to manage their workload and effectively regulate
their banks.
The impact of these changes is that banks are receiving less hands-on assessment by the
regulators, less time spent with each institution, and the potential for more problems slipping
through the cracks, potentially resulting in an overall increase in bank failures mention in his
paper that the business of Banking is to manage risks associated with accepting deposits,
granting loans and trading portfolios (Jaiye, 2009).
The changing economic environment has a significant impact on banks and thrifts as they
struggle to effectively manage their interest rate spread in the face of low rates on loans,
competition for deposits and the general market changes, industry trends and economic
fluctuations.

Andrea (2010) in his study mentioned that Management failure can be easily recognized in losses
resulting from over-aggressive lending practices and risk tolerances that will too high. However,
as one digs deeper, more subtle failures can be recognized in operational inefficiencies, weak
internal control environments, and lack of management attention to detail. A rising interest rate
environment may seem to help financial institutions, but the effect of the changes on consumers
and businesses is not predictable and the challenge remains for banks to grow and effectively
manage the spread to generate a return to their shareholders.
Risk Management Practices and Processes in the Banking Industry

The banking industry is no doubt a regulated sector as a result of the riskiness of its operation.
Consequently, risk management in banks is fast becoming a discipline that every participants and
players in the industry need to align with. As earlier noted, it is a process which involves:
Risk identification: In order to properly manage risks, an institution must recognize and
understand risks that may arise from both existing and new business initiatives.
Risk Measurement: Once risks have been identified, they should be measured in order to
determine their impact on the banking institution’s profitability and capital. Accurate and timely
measurement of risk is essential to effective risk management systems. An institution that does
not have a risk measurement system has limited ability to control or monitor risklevels.
Risk Monitoring: Institutions should put in place an effective management information system to
monitor risk levels and facilitate timely review of risk positions and exceptions. Monitoring
reports should be frequent, timely, accurate, and informative and should be distributed to
appropriate individuals to ensure action, whenneeded.
Risk Control: After measuring risk, an institution should establish and communicate risk limits
through policies, standards, and procedures that define responsibility and authority. These limits
should serve as a means to control exposure to various risks associated with the banking
institution’s activities (Kumar, et al, 005).
2.4 Risk Management Process and System
To control or eliminate the risk in banking industry and to make banking function well, there is a
need to manage all kinds of risks related with the banking. Risk management becomes one of the
main functions of any banking services and consists of identifying the risk and controlling them,
means keeping the risk at acceptable level. These levels differ from institution to institution and
country to country. In Risk Management system there is no single way fit for all banks.
Therefore, NBE requires each bank to develop its own comprehensive risk management system
fitted to its need and circumstances. Moreover, NBE in its risk management guideline for Public
and Private Banks has claimed that, the risk management activities takes place at different
hierarchical levels. Hence, it has indicated the following hierarchical levels of risk management
activities in every financial institution.
Strategic level: Generally consist of definition of risks, ascertaining institutions risk appetite,
formulating strategy and policies for managing risks and establish adequate systems and controls
to ensure that overall risk remain within acceptable level and the reward compensate for the risk
taken.

Macro Level: It encompasses risk management within a business area or across business lines.
Generally the risk management activities performed by middle management or units devoted to
risk reviews fall into this category.
Micro Level: It involves “On-the-line” risk management where risks are actually created. This is
the risk management activities performed by individuals who take risk on organization’s Behalf
such as front office and loan origination functions. The risk management in those areas is
confined to following operational procedures and guidelines set by management.

2.5 Techniques of Risk Management

GAP Analysis it is an interest rate risk management tool based on the balance sheet, which
focuses on the potential variability of net-interest income over specific time intervals. The
information on GAP gives the management an idea about the effects on net-income due to
changes in the interest rate.(Cumming and Beverly,2001).
Duration-GAP Analysis: It is another measure of interest rate risk and managing net interest
income derived by taking into consideration all individual cash inflows and outflows. Duration is
value and time weighted measure of maturity of all cash flows and represents the average time
needed to recover the invested funds. (Cumming and Beverly,2001).
Securitization: it is a procedure studied under the systems of structured finance or credit- linked
notes. Securitization of a bank’s assets and loans is a device for raising new funds and reducing
bank’s risk exposures. The bank pools a group of income-earning assets and sells securities
against these in the open market, thereby transforming illiquid assets into tradable asset backed
securities (Croupy and Robert, 2001).
Sensitivity Analysis: it is very useful when attempting to determine the impact, the actual
outcome of a particular variable will have if it differs from what will previously assumed. By
creating a given set of scenarios, the analyst can determine how changes in one variable(s) will
impact the target variable (ibid1).
Internal Rating System An internal rating system helps financial institutions manage and control
credit risks they face through lending and other operations by grouping and managing the credit-
worthiness of borrowers and the quality of credit transactions (Cumming and Beverly, 2001).

Simulation - this model measures the sensitivity of net interest income and capital to certain key
variable risks, including changes in interest rates. The model is dynamic and takes a long time
until any significant results can be obtained.
Analysis period - interest rate risk in this model is measured by calculating the present value of
assets, liabilities and off-balance sheet positions of banks to then measured sensitivity of the net
value of the interest rate changes (Barjaktarović,2009).

2.7 Review of Empirical Literature

Reviewing of Empirical literature will provides a summary of some of the published work on the
management of risks by banks in developed and developing economies. Hassan, (2010) the
researcher conducts this research with the title of a comparative study of Handles banking and
Swanbank; how risk has been managed during the last decade. In this thesis the authors strive to
investigate the risk management phenomena in the banking sector by conducting a longitudinal
comparative study in two different banks. In a broader perspective to understand the phenomena
the authors depart from theoretical framework that recognizes the social and cultural elements of
risk.
Khalid and Amjad (2012) conducted a research on the risk management in Islamic banking in
Pakistan. The authors use the same model suggested by Al-Tamimi and Al-Mazrooei (2007) of
risk management practices. The results indicate that Islamic banks are somewhat reasonably
efficient in managing risk where understanding risk and risk management risk monitoring and
credit risk analysis, are the most influencing variables in risk management practices.

Shafiq and Nasr (2009) examine the risk management practices followed by Public and Private
Commercial Banks in Pakistan. The results reveal the following: (i) the greatest exposures banks
face are credit risk, liquidity risk, interest rate risk, foreign exchange risk and operating risk; (ii)
significant differences exist in the application of risk management practices among public sector
and local private Public and Private Commercial Banks; and (iii) Public and Private Commercial
Banks‟ staff basically understand risk management but additional training is required to enhance
their expertise in the area.

Hassan (2009) seeks to identify the risks posing the greatest exposure for Islamic banks in
Brunei Darussalam and to examine the effectiveness of risk management techniques utilized in
these banks. The results of the study reveal that the three major risks affecting the banks are
foreign-exchange risk, credit risk and operational risk. Also, Islamic banks are reasonably
efficient in managing risk; and risk identification, and risk assessment and analysis are the most
influencing variables in risk management practices.

Rekha A. (2004) Risk management in Public and Private Commercial Banks (A case study of
public and private sector banks) Banks is in the business of managing risk, not avoiding it. To
the researcher, Risk is the fundamental element that drives financial behavior. Without risk, the
financial system would be vastly simplified. However, risk is omnipresent in the real world.
Financial Institutions, therefore, should manage the risk efficiently to survive in this highly
uncertain world. The future of banking will undoubtedly rest on risk management dynamics.

Christie-Veitch (2005) examines the status of operational risk management in Trinidad,

Barbados and Jamaica; assesses its importance relative to the other risks and reviews the
practices for managing operational risk by the financial institutions. The findings are analyzed
based on the assessment of compliance with regard to Basel Core Principles for the management
of operational risk. The study reveals a number of findings: (i) the framework necessary to
identify, assess, monitor and control operational risk is still not evident, (ii) the management of
operational risk is basically limited to implementing and testing internal controls, (iii)
operational profile is not currently reviewed and adjusted based on specific strategies, (iv) the
plans to handle business disruption are somewhat in place but are not subject to testing or
scenario analysis, (v) best practices with regard to operational risk are not finalized or circulated,
and (vi) operational risk management methodologies are not being disclosed by banks.

Fasika (2012) analyzes the operational risk management practices of CBE by taking in to
account the operational risk factors (Loss events) and their effect on entire banks performance.
The results of the study reveals that the management should pay attention to those contributory
Operational risks so as to manage the operational risk effectively and efficiently, particularly, to
operational risk management tools as the extracted factors has shown. Also the importance of
awareness creation and accurate on time capturing of internal loss data are in consistent with
factor analysis findings of management supervision and follow-up and capturing of internal loss
data as both are among the extracted factors.

Tsion (2015) analyzes the Risk Management Practice of selected branch of Ethiopian
Commercial Banks at Addis Ababa by taking into account the operational risk factors and their
effect on entire banks performance. The results of the study indicate that Ethiopian banks are
utilizing some of the approaches/techniques traditionally used to manage risks today the findings
suggest that banks operating in Ethiopia are risk-focused.

3. Methodology

3.1 Research Approach and Design

In order to meet the objective of this study, the researcher employed descriptive type of research
design due to fact that this study aimed at assessing the current status of risk management in
banks operating in Hawassa. The researcher was also used the quantitative and qualitative
research approach or “mixed-mode designs” that combine features of quantitative and qualitative
designs and collect both types of data may be desirable.

3.2 Data Type and Sources, Methods of Data Collection and Analysis

Data type used was both primary and secondary. Primary data have been collected directly from
the respondents by distributing questionnaires. Also, the direct personal interview has made with
selected clients of the banks. Whereas secondary data are data that have been collected for some
other purpose. Secondary data that has been gathered from review of reports, bulletins, journals,
text books and documents of the study organization. Then, descriptive type of data analysis have
been employed in order to meet the objective of this study.

3.3 Target Population and Sampling

Target Population
Target population of the study was 78 target employees in the risk management department of
both public and private banks operating in Hawassa city Administration.
Sample Size and Sampling Techniques
The sample size for this study was 65 respondents drawn from the total population of 78 using
purposive sampling technique. This was elaborated as follow:

Table 1: Sample Size Determination

NoSelecting Area Form Public From Private Total Population C Total Sample Size D=
Banks “A” Banks “B” = A+B (C/∑C)*n

1 Branch Managers 1 5 6 5
2 Internal Auditors 1 9 10 9
3 Deputy Branch 1 1 2 1
manager
4 Bank 10 50 60 50
Accountants
Total 13 65 78 65
Human Resources of banks operating in Hawassa, 2020

The researcher have been used this judgmental sampling technique in order to collect the
relevant information with concerned body. Accordingly, the sample size selected banks’
Managers and Duty managers and others related department bank staffs have been selected by
purposive sampling or based on personal judgment for the study have been selected. Therefore,
the total targeted population was 78 and also popular customers were also selected purposively
for interview researcher approach with Likert scale type of questions which have been designed
for each research question. Data

3.4 Reliability of the test

The test of reliability is another important test of sound measurement. A measuring instrument is
reliable if it provides consistent results.
Table 2: Reliability Analysis
Cronbach's Alpha N of Items
0.969 14

From table 2 above, the value for Cronbach’s Alpha (α) was 0.969 which is more than 70% for
all variables related with specific objectives of this study. When these calculated reliability value
is more 0.70 which acceptable, and compared with the minimum valueofalpha0.70 advocated
and a reliability value (α) greater than 0.6 is also acceptable by Cronbach’s (1951). Then, the
responses generated for all of the variables ‘used in this research were reliable enough for data
analysis. This implies that the data incorporated in SPSS version

3.5 Ethical consideration

The following ethical considerations have been given attention by the researchers and
enumerators while conducting the research that includes voluntary participation, no harm to
participants, anonymity and confidentiality, not deceiving the subjects and privacy of
participants. With regarding to the voluntary participation of respondents, no participant has been
forced to take part in the research and participants had low to withdraw from the research at any
moment. With regarding to harm to the participants, the researcher ensured that there is no any
physical or psychological harm has done to the participants as a result of the study. When it
comes to anonymity and confidentiality, all information gathered during the study has been
handled confidentially and permission from the participants was obtained for all information to
be shared publicly. Not deceiving the subjects since participants has informed clearly about the
aim, purpose and procedures of the study and has not deceived in any way. Finally, privacy of
participants has been respected.

4. Results of the study

This part of the article is presents the analysis of data collected from sixty one (61) respondents
out of sixty five (65) sample respondents from selected banks operating in Hawassa. The
response rate was 93.84% which implies almost all respondents have been participated in the
process of data collection. Then, the analysis of the data was based on the questionnaires
collected first section of the analysis concerns about assessment of types of risks faced by banks
operating in Hawassa and familiarity of bank staffs with risk exposure of the bank by the banks
operating in Hawassa. This has done as follow:

4.1 Analysis on Type of risk exposures

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will
differ from an expected outcome or return. Risk includes the possibility of losing some or all of
an original investment. Banks face risks like Credit risk, liquidity risk, Operational risk, Interest
rate risk and Foreign exchange risk which analyzed as follow:

Table 3: The type of risk exposure

Which type of risk is being the greatest Agree Disagree Total Total Rank
exposure in your bank? Frequency %
Credit risk is being greatest exposure in 61 0 (0%) 61 100% 1st
your bank (100.0%)
Liquidity risk is being greatest exposure 49 12(19.7) 61 100% 2nd
in your bank (80.3%)
Operational risk is being greatest 47 14(23.0% 61 100% 3rd
exposure in your bank (77.0%) )
Interest rate risk is being greatest 42 19(31.1% 61 100% 4th
exposure in your bank (68.9%) )
Foreign exchange risk is being greatest 33 28(45.9% 61 100% 5th
exposure in your bank (54.1%) )
Source: Personal survey, 2020

To achieve the above specific objective, the researcher considered agreement with statement
asked to assess which risk is greatest exposure in your banks operating in Hawassa as criteria to
rank the most important risk and more agreement on this risks shows risks has greatest exposure
in banking business. Accordingly, table 4.7 summaries the result of the various types of risks
faced by the banks as ranked by risk management employees within the sampled banks. The
results indicate that for the six banks selected as the sample in the current study in the order of
importance for risk showed that credit risk 61 (100.0%), liquidity risk 49 (80.3%), operational
risk 47 (77.0%), interest rate risk 42 (68.9%), and foreign exchange risk 33(54.1%) and ranked
as1st, 2nd, 3rd, 4th, and 5threspectively. Besides the level of disagreement 0 (0%) credit risk,
12(19.7%) liquidity risk, 14(23.0%) operational risk, 19(31.1%) interest risk and 28(45.9%)
foreign exchange risk respectively. This implies that credit risk as the most relevant in the
banking industry followed by liquidity, operational, interest and foreign exchange risk
respectively. Hence, the researcher concluded that the banks operating faced all types of risks but
credit risk is the greatest exposure in your banks. This clearly shows that by taking in to account
the rank of risks depend on percentage score or frequency, credit risk is vital and mostly faced
risk and then followed by liquidity and operational risk. Hence, as majority of the banks faced
credit risk. So that, this study under consideration is demanding and its findings are Important to
get feedback. It is useful for the banks‟ to take remedial timely action to improve their credit
management practices. Also, the researcher asked the clients about risks faced by banks and
which risk is highest one, they responded that major risks for banks include credit, operational,
market, and liquidity risk. Credit risk is the biggest risk for banks. While banks cannot be fully
protected from credit risk due to the nature of their business model, they can lower their
exposure in several ways.

4.2 The Awareness of the staffs with concept of risk management practice at the banks
Awareness of staff on risk is very important because, it leads to increased performance, better
knowledge and management of risks led to greater efficiency and performance of team members.
Team members will see better project risk decisions being made, which will result in the
decrease in issues and impediments. The concept was analyzed as follow:
Table 4: The familiarities of the staffs about the concept of risk management practice

Strongly

Neu
Disagree

Total Percent
Agr

Strongly
Disagree

FrequencyTotal
I am Aware of about the risk

disagree
tral

ee
type

Credit Risk (CR) which deals 2 5 0 (0) 28 26 61 100%

with about the potential of a (3.3% (8.2% (45.9%) (42.6%
bank borrower or counterparty ) ) )
to fail to meet its obligations
Liquidity Risk(LR) which 3 5 1 28 24 61 100%
deals with about funding of (4.9%) (8.2%) (1.6%) (45.9%) (39.3%)
long-term assets by short-term
liabilities, thereby making the
liabilities subject to rollover or
refinancing risk
Interest rate Risk(IRR) which 2 1 8 19 31 61 100%
deals with about the exposure (3.3%) (1.6%) (13.1%) (31.1%) (50.8%)
of a Bank’s financial condition
to adverse movements in
interest rates
Operational Risk (OR) which 3 2 8 17 31 61 100%
deals with about ‘the risk of (4.9%) (3.3%) (13.1% (27.9%) (50.8%)
loss resulting from inadequate )
or failed internal processes,
people and systems or from
external events
Foreign Exchange Risk (FXR) 0 (0%) 0 (0%) 2 28 31 61 100%
which deals with about a bank (3.3) (45.9%) (50.8%)
may experience loss as a result
of unfavorable exchange rate
movements during a period in
which it has an open position,
either spot or forward or both,
in the same foreign currency
Source: Personal survey, 2020

Awareness about risk management is important in an organization because without it, a firm
cannot possibly define its objectives for the future. If a company defines objectives without
taking the risks into consideration, chances are that they will lose direction once any of these
risks hit home or adversely affect the overall performance of business organizations. It is against
the above view that respondents selected from banks operating in Hawassa were asked about
level of awareness on each risk type that the banks face. They asked to express their level of
agreement on the statement “Credit Risk (CR) which deals with about the potential of a Bank
borrower or counterparty to fail to meet its obligations” about their level of understanding on
credit risk exposure and responded as 2(3. 3%) strongly disagree, 5(8.2%) disagree, 0(0%)
Neutral, 28 (45.9%) agree, and 26 (42.6%) strongly agree respectively. Out of total 61
respondents, around 54 (88.5%) respondents agreed with statement they asked about their
awareness level on credit risk but only 7 (12.5%) respondents disagreed on the statement. This
implies that respondents selected from banks in Hawassa has enough understanding on credit
risk which will contributes to credit risk management in one hand and organizational
effectiveness in other hand.

With regarding to familiarities of respondents with liquidity risk, the respondents also asked to
express on statement” liquidity risk (LR) which deals with about funding of long-term assets by
short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk” then,
2(3.3%) strongly disagree1(1.6%) disagree, 1 (1.6%) neutral, 19 (31.1%) agree, and 31 (50.8%)
strongly agree respectively. Out of total 61 respondents, around 50 (81.1%) respondents agreed
with statement they asked about their awareness level on credit risk but only 10 (13.1%)
disagreed and 1(1.6%) respondents were neutral on the statement. This implies that respondents
selected from banks in Hawassa has enough understanding on credit risk which will contributes
to liquidity risk management in one hand and manage the liquidity position of the company to
optimum level.

When it comes to the familiarities of respondents with liquidity risk, the respondents also asked
to express on statement” Interest rate Risk (IRR) which deals with about the exposure of a
Bank’s financial condition to adverse movements in interest rates” then, 2(3.3%) strongly
disagree, 1(1.6%) disagree, 8 (13.1%) neutral, 19 (31.1%) agree, and 31 (50.8%) strongly agree
respectively. Out of total 61 respondents, around 52 (85.1%) respondents agreed with statement
they asked about their awareness level on liquidity risk but only 3(4.9%) disagreed and 8(13.1%)
respondents were neutral on the statement. This implies that respondents selected from banks in
Hawassa has enough understanding on credit risk which will contributes to interest rate risk
management in one hand and manage the profitability position of the banks. The ability to
manage interest rate risk will help companies act more confidently on future business decisions.
Their knowledge of the risks they are facing will give them various options on how to deal with
potential problems related to interest fluctuation.

With regards to familiarities of respondents with operational risk, the respondents also asked to
express on statement” Operational Risk (OR) which deals with about ‘the risk of loss resulting
from inadequate or failed internal processes, people and systems or from external events” then,
3(4.9%) strongly disagree, 2(3.3%) disagree, 8 (13.1%) neutral, 28 (45.9%) agree, and
31(50.8%) strongly agree respectively. Out of total 61 respondents, around 47 (81.5%)
respondents agreed with statement they asked about their awareness level on operations risk but
only 5(8.2%) disagreed and 8(13.1%) respondents were neutral on the statement. This shows that
respondents selected from banks in Hawassa has enough understanding on operational risk which
has positive influence on overall risk management in one hand and manage the operational
position of the banks. The ability to manage operational risk help companies act more
confidently on current operation and future business decisions.
Finally, the familiarities of respondents with foreign exchange risk, the respondents also
requested to express their level of awareness on statement” Foreign Exchange Risk (FXR) which
deals with about a bank may experience loss as a result of unfavorable exchange rate movements
during a period in which it has an open position, either spot or forward or both, in the same
foreign currency” then, 0(0%) strongly disagree, 0(0%) disagree, 2(3.3%) neutral, 28
(45.9%)agree, and 31 (50.8%) strongly agree respectively. From the 61 respondents, around 59
(86.7%) respondents agreed with statement they asked about their awareness level on foreign
exchange risk but only 2(3.3%) respondents were neutral on the statement. This tells us that
respondents selected from banks in Hawassa has enough understanding on foreign risk which has
positive influence on overall risk management in one hand and manage the operational position
of the banks. This risk is the main cause of uncertainty in any organization due to change
currency oversea country in terms of domestic country. Thus, the banks increasingly focus more
on identifying foreign exchange risks and managing them before they even affect the business
performance. As per interview with clients, they responded that understanding risk and
appropriately manage it is important because it allows a business to control and often times
prevent – the financial, political, social and cultural ramifications associated with risks. Next, the
business needs to perform a risk analysis, which will determine how any potential risks would
affect the business.

5. Summary of Findings
The objective of this study is to assess the risk management practice of commercial banks
operating in Hawassa city administration. To this end, the required data was collected through
structured questionnaire from employees in the risk management department in the banks and
through interview from the clients of the banks.
The researcher totally distributed seventy eight questionnaires to the sampled in the
respondents in the banks. Out of 65 questionnaires distributed to respondents, sixty one (61)
questionnaires were appropriately filled and returned back with response rate of (93.84%). Then,
the descriptive statistics analysis has done based on the questionnaires collected and summarized
as follow: When it comes to risk is greatest exposure, the result of this study showed that credit
risk 61 (100.0%), liquidity risk 49 (80.3%), operational risk 47 (77.0%), interest rate risk 42
(68.9%), and foreign exchange risk 33(54.1%) and ranked as1 st, 2nd, 3rd, 4th, and
5threspectively. Besides the level of disagreement 0 (0%) credit risk, 12(19.7%) liquidity risk,
14(23.0%) operational risk, 19(31.1%) interest risk and 28(45.9%) foreign exchange risk
respectively. This implies that credit risk as the most relevant in the banking industry followed
by liquidity, operational, interest and foreign exchange risk respectively. According to interview
made with customers of the banks, they responded that credit risk is the biggest risk for banks.
While banks cannot be fully protected from credit risk due to the nature of their business model,
they can lower their exposure in several ways.

 Concerning with familiarities of the staffs about the concept of risk management practice and
types of risks commercial banks in Hawassa City, around more than half of respondents credit
risk, liquidity risk, liquidity risk, interest rate risk, operational risk and operational risk
respectively. Also the response of interview with clients, they responded that understanding risk
and appropriately manage it is important because it allows a business to control and often times
prevent – the financial, political, social and cultural ramifications associated with risks. Next, the
business needs to perform a risk analysis, which will determine how any potential risks would
affect the business

6. Conclusion
Based on findings of the study concluded the following points. These are:

The finding of the study shows that commercial banks faced credit risk, liquidity risk,
operational risk, interest rate risk, and foreign exchange risk and ranked as1st, 2nd, 3rd, 4th, and
5th respectively. Hence , the banks should give more of their attention on credit risk as far as the
findings of this study pointed out that credit risk is the mostly faced risk to banks in particular
and take care about how to assess, identity, manage and control all the types of risks faced by the
banks. In order to do these, the banks should update their risk management practice and should
have continues learning and good commination system that mitigate all types of risks that the
banks face.

Also, the result of current study revalued that employees are familiar with risk management
practice which is very important for the banks performance and success, it is better for banks
operating in Hawassa to improve the awareness level of their employees concerning the
importance of risk management practices as far as the effective management of risk is center to
improve the performance of the banks. Training is considered an overhead activity, which does
not justify much attention or resources. There are few or no training professionals on staff. So the
researcher recommended that banks should give emphasis on staff training in the area of risk
management.

Roads for the Further Research

Meanwhile any study cannot be free from limitations; accordingly there are some limitations in
current study. In the beginning, it is focused only on assessing the management practice by
commercial banks operating in Hawassa city administration, Sidama region, Ethiopia. The
findings of this study will be improved if it assess the factors affecting the effective risk
management other than assessing practice of risk management and employ the econometric
model to test the impact of explanatory variables incorporated in the model on risk management
practice of the commercial banks. In other way, the findings of this study may be difficult to
generalize about all banks in other regions and at national level. Hence, this study can be
improved if it will be done at other regions and national level by comparing internal and external
factors affecting good risk management practice of banking industry of Ethiopia.

Acknowledgements

First of all, I would like to give unlimited thanks for God for helping me preparing this article.
Next to God, I appreciate Pharma College Hawassa Campus, which is the top private higher
education institutions in Ethiopia that striving to serve the community by providing trainings in
both undergraduate and postgraduate programs in health science and business fields and
supporting problem solving researches systematically. Pharma College is well known in Ethiopia
by providing quality education for society and awarded the reward from the hand of Prime
minster of Ethiopia, Dr. Abiy Ahemed for being one of the top institutions voluntarily pay their
tax obligation in 2018/2019. In addition, I would like to express our thanks to the staff members
of Pharma College especially Ato Seyoum Kebede (President of the college), Dr. Wengelawit
Seyoum (Vice president of the college), Ato Teklu W/Mariam (Academic dean), Ayneshet
Agegnew (MBA & MSC corditaor) Anteneh Fikru (community service and research director)
and Ato Million Terefe (HRM) and other staff of the campus for supporting me in preparing this
article. Besides, I also extend my heartfelt thanks to the editors and the anonymous reviewers for
their guidance and constructive comments in developing this article.

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