Risk Management Strategy and Financial Performance of Listed Banks at Nigeria Stock Exchange

Abstract

This study was to evaluate the risk management strategies and financial performance of listed banks at Nigeria Stock Exchange (NSE). Specifically, the study sought to determine the effect of credit diversification, Market risk hedging, credit risk insurance and capital buffer strategies on financial performance of listed banks at the Nigeria Stock Exchange. Contingency theory, Modern Portfolio theory, Financial Intermediation Theory, Extreme Value theory and Agency theory were used to expound on the effect of risk management strategies and financial performance. Longitudinal cross sectional survey research design was adopted. The study’s target population includes all the 28 listed banks at Nigeria stock exchange. Data was collected from 2010 to 2019 for 20 listed banks in Nigeria. The secondary data was collected from audited financial statements of listed banks and other relevant internal report. Descriptive statistics were employed with the use of panel least regression model and appropriate model diagnostic tests carried out on the panel data. Data collected was subjected to diagnosis tests of autocorrelation, stationarity, fixed and random effects. Panel model was used to establish the relationship and significance between the study variables. The formulated hypotheses were tested. The study found out that there are insignificant effect between credit diversification, credit risk insurance strategies and financial performance of the listed banks at NSE. The study also revealed that there was a positive significant effect between market risk hedging, capital buffer strategy and financial performance of the listed banks. The study also finds out that the bank size had moderating effect on the relationship between Risk Management strategies and financial performance of the listed banks at NSE. The findings from the empirical evidence provided by the study indicate that banks must be involved in risk management practices so as to achieve good returns on asset and capital for the banking operation. Conclusively, the results from the study therefore upheld a theoretical expectation that bank risk management strategies has significant effect statistically on financial performance. The study therefore recommends that, banks need to improve on credit risk management so as to impact positively on the earnings from assets (higher income) and reduce cost/expense on non-performing loans to enhance the level of financial performance. Banks must review the need to maintain optimal economic capital position to guarantee adequate capital buffer for the banks to ensure higher profitability. Bank regulators must evolve an inclusive approach in monitoring and supervision of banks periodically. Notable constraints of this study are its short period of examination and the measuring metrics employed. Also there available limited theoretical and literature review on this study. Further study should evaluate the effect of qualitative aspect of the research by including management and corporate governance aspects in financial performance of Banks.