THE IMPACT OF RISK MANAGEMENT ON BANKING PERFORMANCE IN

MOGADISHO SOMALIA

NAME: ZAKARIYE ABDIRISAK MURSAL

ID. CARD: 6560

APROPOSAL SUBMITED IN PARTIAL FULFILMENT FOR THE REQUIREMENT

OF THE AWARD OF BECHOLAR OF ACCOUNTINGAND FINANCE AT HORSEED
INTERNATIONAL UNIVERSITY

NOVEMBER 2019
 CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter contains background of the study statement of problem research objectives research
questions scope of the study significance of the study and operational definition of the key terms.
1.1 Background of the Study
A bank is a commercial or state institution that provides financial services, including issuing
money in various forms, receiving deposits of money, lending money and processing
transactions and the creating of credit (Campel, et. al., 1993) Financial performance is
company’s ability to generate new resources, from day- to- day operations, over a given period
of time; performance is gauged by net income and cash from operations. A portfolio is a
collection of investments held by an institution or a private individual (Apps, 1996). Risk
management is the human activity which integrates recognition of risk, risk assessment,
developing strategies to manage it, and mitigation of risk using managerial resources. (Apps,
1996)
However, it is not easy for banks to always maintain maximum profits due to the large number of
business risks that will be faced by banks including credit risk, liquidity risk, and interest rate
risk. The diversity of risks faced by banks requires management to be able to implement
effective risk management because the higher the expected performance achievement, the higher
the level of risk it faces because banks face a dynamic business environment. Hussain and Al-
Ajmi (2012) conclude that the commercial banks face credit risk and operating risk as the part of
the most important risks. Considering that banks face various risks that have an impact on their
performance, it is important for management to mitigate these risks by implementing effective
risk management.
Banks are special as they accept and deploy large amount of uncollateralized public funds in a
fiduciary capacity, but also leverage such funds through credit creation. Indian banking system
divided into four phases i.e. these are early phase era: 1770-1905, pre-independence era 1906-
1946, post-independence regulated era: 1947-1993, post-independence deregulated from 1993
onwards.
The Chinese banking system is critical to the functioning of the Chinese economy, being the
main conduit through which savings are allocated to investment opportunities. Banking activity
in China has grown rapidly over the past decade in association with the expansion of the Chinese
economy, and the Chinese banking system now includes some of the world’s largest banks.
Chinese banks have become more commercially orientated over this period, although the
Chinese Government retains considerable influence over their activities (Tan, Nicholas. 2012).

Ongore & Kusa (2013) studied the effects of various factors in banking sector performance in
Kenya. The results of the study showed that board and management decisions influence the
performance of commercial banks in Kenya and also that macro-economic factors have
insignificant influence on their performance. This study however omitted the effects of industry
specific factors on the performance of commercial banks. Macro- economic factors that
influence the performance of commercial banks have also not been evaluated in the Somalia
context despite their importance in determining the performance of any industry in the economy.
It is clear therefore that in Somalia, no study has been done on the impact of risk management on
banking performance in Mogadishu Somalia

This study will focus on the factors affecting the financial performance of Commercial Banks in
Mogadishu Somalia.
1.2 Statement of the problem
Increasing shareholders’ return epitomizing bank performance is one major objective of bank
management. The objective often comes at the cost of increasing risk. Bank faces various risks
such as interest risk, market risk, credit risk, off balance risk, technology and operational risk,
foreign exchange risk, country risk, liquidity risk, and insolvency risk (Tandelilin, Kaaro,
Mahadwartha, and Supriyatna, 2007).
Macro- economic factors that influence the performance of commercial banks have also not been
evaluated in the Somalia context despite their importance in determining the performance of any
industry in the economy. It is clear therefore that in Somalia, no study has been done on the
determinants of bank performance using the industry specific factors, the bank specific factors
and the macro-economic factors.
After the collapse of the central government of Somalia in 1991, the country hasn’t had a
formally effective banking system that provides basic banking services except “Xawala”
business for money transfer services and small unstructured deposits. Though effective Banking
policies and regulations are not still yet in place, but, in recent years a number of private
commercial banks operating under the banking principles have emerged. However, there are
several unique challenges facing Somalia’s banking industry, such as liquidity risk, credit risk
and operational risk. This study will focus on the impact of risk management on banking
performance in Mogadishu Somalia
1.3 Purpose of the Study

This study the researchers will describe the impact of risk management on banking performance
in Mogadishu Somalia
1.4 Research Objectives
1.4.1 General Research Objective
The general research objective of the study is to investigate the impact of risk management in
banking performance
1.4.2 Specific Research Objectives
 To determine the impact credit risk on banking performance in Mogadishu Somalia.
 To describe the impact operational risk on banking performance in Mogadishu Somalia.
 To find out the impact liquidity risk on banking performance in Mogadishu Somalia.
1.5 Research questions
 What is the impact credit risk on banking performance in Mogadishu Somalia?
 What is the impact operational risk on banking performance in Mogadishu Somalia?
 What is the impact liquidity risk on banking performance in Mogadishu Somalia?
1.6 Significance of the Study
Risk management in banks has become more important not only because of the financial crisis
that the industry is experiencing currently, but also a crucial concept which determine banks’
survival, growth and profitability. The aim of this study is to investigate the impact of risk
management on the performance banks. This study will be useful and benefit from the banks in
Mogadishu, the upcoming researcher and the government agencies
1.7 Scope of the Study
1.7.1 Content Scope
This study will focus on the impact of risk management on banking performance
1.7.2 Geographical Scope
This study will be carried out in Mogadishu
 1.7.3 Time scope
This study will be conducted during November 2019 to June 2020
1.8 Definition of Key Terms
1. Risk Management: In the world of finance, risk management refers to the practice of
identifying potential risks in advance, analyzing them and taking precautionary steps to
reduce/curb the risk.
2. Banking Performance: may be defined as the reflection of the way in which the resources
of a bank are used in a form which enables it to achieve its objectives.

1.9 Conceptual Framework

Dependent variable In depended variable

Risk Management Banking Performance