JIGJIGA UNIVERSITY

COLLEGE OF BUSSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

FACTORS AFFECTING CREDIT RISK MANAGEMENT PRACTICES OF

SELECTED PRIVATE BANKS IN GODE TOWN, SOMALI REGION,
ETHIOPIA

THESIS PROPOSAL SUBMITTED TO THE SCHOOL OF GRADUATE

STUDENTS DEPARTMENT OF MANAGEMENT FOR THE PARTIAL
FULFILMENT OF A MASTER’S DEGREE IN THE MANAGEMENT
FIELD

SUBMITTED BY

KAD MOHAMUD HUSSEIN

ADVISOR:
Dr. Abenet Yohannes (Ph.D.)
(Assistant Professor)
CO-ADVISOR
SEMA AYALNEH (MS.)

Jigjiga University
June 2021

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 ACKNOWLEDGEMENTS

First, I thank almighty Allah, the most merciful and the Most Gracious, Who gave me the
courage and patience to achieve this milestone.

I am indebted to my Advisor, Dr. Abenet Yohannes Hailu (Ph.D.) and Co-Advisor, Mr. Sema
Ayalneh, for their patient, guidance, encouragement, and endless support. Dr. Abenet and
Mr. Sema spared their valuable time for correction and comments for my research work,
right from day one until the end of this study. Their guidance and suggestions have brought
substantial improvement in my work. I am also very thanks full to the other members of the
support team.

Secondly, my deepest and sincere gratitude to my family for their prayers and patience. I am
hopeful that this work and degree would pay all their sacrifices.

Finally, I want to say thank you to everyone who helped me during this study.

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 ACRONYMS AND ABBREVIATIONS

BOD= Board of Director

PSB= Private Sector Bank
RMP=Risk Management Practices
CR = Credit Risk
HR= Human Resource
IRR =Interest rate Risk
LR= Liquidity Risk
MR= Market Risk
NBE= National Bank of Ethiopia
LRM= Loan Review Mechanism
OR = Operational Risk
RAROC = Risk Adjusted Rate of Return on Capital
RSA = Rate sensitive assets
SPSS= Statistical Package for Social Sciences
VAR= Value at Risk
MRM= Market Risk Management
NBE= National bank of Ethiopia
FIs= Financial Institution
GD=Gode
RI= Risk Identification
D/t = Different
CBE=Commercial Bank of Ethiopia

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 TABLE OF CONTENT
Contents
ACKNOWLEDGEMENTS.................................................................................................................i
ACRONYMS AND ABBREVIATIONS............................................................................................ii
TABLE OF CONTENT.....................................................................................................................iii
List of Table.........................................................................................................................................v
CHAPTER 1: INTRODUCTION AND CONTEXT OF THE STUDY..........................................1
1. Introduction.......................................................................................................................................1
1.1. Background of the Study...........................................................................................................1
1.2. STATEMENT OF THE PROBLEM..............................................................................................4
1.3. OBJECTIVES OF THE STUDY...................................................................................................5
1.3.1. General Objective........................................................................................................................5
1.3.2. Specific Objective.......................................................................................................................5
1.4. RESEARCH QUESTIONS............................................................................................................5
1.5. SIGNIFICANCE OF THE STUDY...............................................................................................5
1.6. SCOPE OF THE STUDY..............................................................................................................6
1.7. DEFINITION OF KEY TERMS....................................................................................................6
1.8. ORGANIZATION OF THE STUDY...........................................................................................6
CHAMPER 2: LITERATURE REVIEW.........................................................................................7
2.1. Literature Review...........................................................................................................................7
2.1.2.1 Financial Risk...........................................................................................................................9
2.1.2.2. Non-Financial Risks...............................................................................................................11
2.1.3. Factors influencing risk Management.......................................................................................13
2.1.4. Risk management and Profitability...........................................................................................13
2.2. Definition, Functions, and Roles of Banks...................................................................................14
2.3. Risk Management in Banks..........................................................................................................15
2.4. Rationales for Risk Management in Banks...................................................................................15
2.4.1. Financial Economics Approach.................................................................................................16
2.4.2. Institutional Theory...................................................................................................................17
2.4.3. Agency Theory..........................................................................................................................17
2.4.4. Stakeholder Theory...................................................................................................................18
2.5. The Process of Effective Risk Management.................................................................................18

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2.6. Benefits of effective risk management.........................................................................................20
2.7. ESTABLISHING CONTEXT OF RISK MANAGEMENT........................................................20
2.8. RISK IDENTIFICATION AND ASSESSMENT........................................................................21
2.9. RISK INTEGRATION AND PRIORITIZATION.......................................................................21
CHAPTER 3: RESEARCH METHODOLOGY............................................................................23
3.1. Description of the Study Area......................................................................................................23
3.2. Research Design...........................................................................................................................24
3.3. Source of Data..............................................................................................................................24
3.5. Instruments of Data Collection.....................................................................................................25
3.6.1. Questionnaire............................................................................................................................25
3.6.2. Interview...................................................................................................................................26
3.6.3. Observation...............................................................................................................................27
3.6.4. Focus Group Discussion............................................................................................................27
3.6.5. Documents ...............................................................................................................................28
3.6.6. Ethical Consideration................................................................................................................28
Work plan...........................................................................................................................................29
Budget Breakdown..............................................................................................................................30
References..........................................................................................................................................31

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List of Table
Table 1Work plan for Thesis proposal on Risk Management..............................................................29
Table 2 Budget Breakdown for Thesis Proposal of Risk Management...............................................30

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CHAPTER 1: INTRODUCTION AND CONTEXT OF THE STUDY

1. Introduction

This chapter intends to provide an overview of this research. It describes the background
information, aim, objective, research questions, rationale, and significance of this study. It
also provides an overview of the methodology undertaken during this research to conclude.
Finally, the current chapter presents an outline of this thesis’s structure.

1.1. Background of the Study

Banks are financial institutions that provide financial services for-profit and have an
important role in the economy and the society by allocating surplus deposits for different
investment purposes (Gestel, &Baesens, 2009).

The financial sector plays an important role in the development of the economy and growth
in any country. The banking sector is considered an important source of financing for most
businesses. The past decade has seen dramatic changes in managing risk in this industry.

Risk is the element of uncertainty or possibility of loss that prevail in any business
transaction in any place, in any mode, and at any time. To sustain its operation, a business
has to earn revenue/profit and thus has to be involved in activities whose outcome may be
predictable or unpredictable. Hence, risks don.t disappear. They gave users a choice, which
to retain and which to shed (Bagch, 2008). The Banks also associated with lending face risk
or credit activity that prevails in any business transaction in any place, in any mode, and at
any time.

Risk in banking is commonly defined as the possibility that outcome of an action being
taken/not taken or an event that could bring an adverse impact on the bank‘s capital, earnings
or viability, and survival. The banking services and operations indeed involve various kinds
of risk; for example, market risk, credit risk, liquidity risk & operational risk.
Taking risks is an integral and unavoidable part of the banking business, indeed, embedded
with the reward for taking it. This shows that there exists a relationship between risk and
reward/return, which in turn leads to the implication that the higher the rate of return is the
greater the risk and risk tolerance one must take. Conversely, it tells that organizations
especially banks should know how to cope with or control risks profitably and strategically in
a sustainable way aligned with their goals (Crouhy, Galai, &Mark, 1976). For this reason,
risk management has become an important function of business these days, unlike those
periods where the significance of risk management was ignored. One can understand risk
management‘s primary goals are to bring benefits to the companies, risk management
practice is the heart of a firm‘s strategy and it also covers all areas of the business process.
Moreover, failing to risk management practice in banking will lead to banking inefficiency
ranging from not knowing what to take next if the first action went wrong, creating
uncertainties and value deteriorations, unwise investment and costly decisions on scare
resources, and lack of accountability and responsibility at the end of the day, to high loss and
finally speedy failure of institutions. However, risk management does no guarantee for
success, it has been evidenced that for most, it is only those banks that have efficient risk
management system will survive in the market and achieve their objectives in the end.

Therefore, Ethiopia's Banks systems had not been given enough attention before 2010,
especially regarding the development of a modern system of assessing, controlling, and
managing risk in the banking operation in line with the changing environment and global
financial standard (Atakilti 2015). Risk management guidelines of the NBE 2010 paved the
way for the latest development of risk management practice in the Ethiopian banking
industry.

The banking business depends upon the profit and loss and cash inflows as well as cash
outflow. In the banking industry, risk management is predominant to monitor in corporate
finance, trading, Sales, and retail banking. The banking business lines distinguish profit
and loss in their banking operation. In particular, the banks undergo liquidity risk, interest
rate risk, market risk, credit risk, and operational risk when they manage the organization
effectively. The risk
management in private sector banks are independents, and they have their methodology. Risk
has always been an essential element of banking. With progressive de-regulations, cross-
border dealings, globalization, the introduction of wise range product and service,
improvement of technology and communication significance change has occurred in the
operating environment and the balance sheet of the banks.

Banks' risks have nowadays increased manifold posing significant challenges to the banks.to
respond to these changes, there have been various initiatives to induce better operating
standards in the banks, great transparency, and sensitivity towards risk management.

The concept of risk management originates from the business of insurance. It has assumed
significance over the years as an important function of management. It consists of five
processes that aim to mitigate business losses. No organization can eliminate risks, but it is
certainly possible to prepare for them. Management of risks involves the following five key
steps.

1. Establishing the context: before dealing with risks, managers must be able to understand
and identify them. To do this, they first comprehend the context in which the risks arise.
2. Identifying the loss: after understanding the context, managers should list down all
possible that may rise. This will depend on the nature of the organization’s business and
its environment. For instance, a company manufacturing chemicals may face the risks of
leakage from it is products units.
3. Analyzing and Evaluating Risks: Every organization faces several kinds of risks, but their
chances differ in every case. Managers should analyze each possible risk individually and
evaluate the chances of it happening. This is because they have to accord more
importance to serious risks than serious ones.
4. Treating the risks: After identifying and analyzing the risk, managers next have to treat
them. This process can include avoiding risks together alternatively; it is also possible to
reduce the possible impact of a risk. For example, a factory can deploy safety measures
and equipment to prevent injuries to its workers. One can even transfer the risks to other
entities. This process includes the use of contracts and notices to shift any possible
liability on others.
5. Monitoring and Reviewing the Risks: monitoring and reviewing the risk is continuous
process managers need to keep checking the livelihood of risks occurring. They must
 regularly follow up on their risk prevention strategies. This step is important because
risks are inevitable and never remain static. The banking activities are mainly exposed to
liquidity risk, interest rate risk, default (or) credit, and operational risks. All assets and
liabilities in banking activities are normally held until maturity and an accrual accounting
system is applied to them.

An organization chart is a diagram that visually conveys the company’s internal structure by
detailing the roles, responsibilities, and relationships between individuals within an entity.
An organizational chart broadly depicts either an enterprise company-wide or drills down to
a specific department or unit.

1.2. STATEMENT OF THE PROBLEM

The overall success in risk management practices depends on the bank's supervision and
follow-up strategy, during managing risk, continuous supervision and monitoring were
highly required for ensuring timely repayment and minimizing the default.

Private Banks of Ethiopia, which have an objective of benefiting the wider society rather
than simply profit-making, through active participation in financing economic development
programs and long term projects of the country, will inevitably require proactive risk
management strategy, particularly in credit risk as project financing needs for long term
commitment of loans.

Persons who are involved in credit risk analysis need to know the whole processes,
procedures, tools, and techniques of risk planning, identifying, monitoring, and controlling
and enough to have the social and interpersonal skills to cross-sell and know the
customer/borrower.

The very nature of the banking business was so sensitive because more than 85% of their
liability was deposits mobilized from depositors, (Saunders, Cornett, 2005 cited in Hagos,
2010).

Global banking crises have been omnipresent during the past decade (Reinhart and Rogoff,
2009), resulting in negative systemic consequences and significant bailout costs to
governments (Hellmann, Murdock, and Stiglitz, 2000). These financial crises have had a
significant impact on bank regulation and supervision (Thana Thana, 2008a). Reforms are
often focused on correcting past abuses and failings, and the tendency is to introduce
legislation that will prevent the last crisis (Filipiak, 2009). Earlier banking crises were
symptomatic of bank runs (Gorton, 2009), and the 1929 financial crisis started with isolated
runs of depositors, which then developed into mass panic and eventually financial collapse
(Canova, 1995).

Since private bank's expansion and high demand for loans are a recent phenomenon, the
challenge they encounter in the manner loans is managed a huge concern. Although there
were some studies on private banks risk management conducted in Ethiopia (Sahlemichael,
2009) on credit risk management system in Ethiopian commercial banks (Case of public and
private banks). Similar studies were also done by Charles Mensha (1999) cited in Hagos M.
(2010) on the importance of credit management in Ethiopia. Those studies made on this issue
were not comprehensive and credit risk management practice may differ and change over
time. Nevertheless, the studies did not assess the challenge they encounter in the manner
loans were managed on the diversified and intensified investment in the country. Therefore,
the study attempts to know the credit risk management practices in private banks of Gode-
Somali region Ethiopia.

1.3. OBJECTIVES OF THE STUDY

1.3.1. General Objective
The general objective of this study is to analyze the risk management practice of private
sector banks in Gode Town, Shebelle Zone, and Somali Region Ethiopia, by examining, the
techniques adopted to mitigate major risk types.

1.3.2. Specific Objective

Specifically, the study has the following objectives:

1. To identify the types of risks faced by Private Sector Banks.

2. To assess the extent of risk management execution techniques of private sector banks.
3. To examine the process of identification, measurement, monitor, evaluation, and control
of risk in private sector banks.
1.4. RESEARCH QUESTIONS
Based on the above-discussed problems, the study will try to answer the following basic
Research Questions.

1. How do the risk management systems of banks work to cope with different risks in
Gode?
2. What is the level of understanding of the different risks and risk management among
the managers of Gode banks?
3. What is the level of risk identification, assessment, analysis, monitoring, and
controlling of d/t risks in Gode Banks?
4. What is the empirical evidence regarding risk management practices in Gode banks?
5. What is the relationship between risk management and the performance of banks in
Gode?

1.5. SIGNIFICANCE OF THE STUDY

This study will be significant because it will deal with issues that banks will face and will
continue to confront them in the future.

After this study, the bank managers will be able to know what is risk management practices
of private banks in Ethiopia as a whole and Gode as specific and how to solve the risk. In
addition to that, the customer also will be able to know how to avoid the things that can cause
the risk.

Thus, this study will be benefited both banks and customers.

1.6. SCOPE OF THE STUDY

The scope of the study is to overview the application of the credit risk management practice
in private banks of Gode-Shebelle zone –Somali region-Ethiopia (Awash bank, Abyssinia,
and Oromia International Banks). It assesses the level of risk management practice by
focusing on responses to all managements and operational staff working under risk
management departments of private banks.
1.7. DEFINITION OF KEY TERMS
It is to be recalled that the primary objective of this study would be to analyze the risk
management practice of private sector banks in the Ethiopian banking industry. However, the
study will focus on the views of management and staff that have direct responsibility and
accountability for the day-to-day risk management activity of every private bank. Therefore,
the study is limited to the opinion, attitude, and perception of management and operational
staff of selected banks' risk management departments. Thus, there would exist a limitation
over the opinions, attitudes, and perceptions of other management members and staff other
than the risk management department under this research which might limit the
comprehensiveness of the assessment of risk management practice with regards to involving
all stakeholders or participants in the sector.

1.8. ORGANIZATION OF THE STUDY

The study will be organized into five chapters. The first chapter introduces the background of
the study, statement of the problem, research questions, research objectives, significance of
the study, the scope of the study, limitation of the study, and organization of the study. The
second chapter presents a theoretical and empirical review of the related literature. The third
chapter deals with the methodology of the study. The fourth chapter describes the analysis,
results, and discussions. The fifth chapter presents the conclusion and recommendations
drawn from the findings of the data in addition to implications for further research.

CHAMPER 2: LITERATURE REVIEW

2.1. Literature Review

This chapter covers the explanation of the theoretical framework/literature review and
developed in a manner that gives insight and a deep understanding of risk management
practice in the banking business. It starts with a definition and concept of the risk and types
of risk in the banking sector. Then the risk management concepts or practices are reviewed.
After that, the literature focuses on risk management processes and techniques. It also helps
the reader to gain an understanding of the benefits of risk management.

A literature review is a summary of previously published works on a particular subject. An

entire scholarly document or a piece of a scholarly work, such as a book or an essay, might
be referred to by the term.
The purpose of a literature review is to give the researcher/author and the audience an overall
picture of what is known about the subject at hand.

The literature review of this study examines the past studies of the banks, risk management
practice, and the various factors, which influence the management of the risks.

Reviews also deal with the studies of risk management and its relationship with performance.

Banks are important in mobilizing and allocating in an economy and can solve important
moral hazards and adverse selection problems by monitoring and screening borrowers and
depositors.

The Office of Risk Management and Analysis (RMA) at the Department of Homeland
Security (DHS) conducted a study to examine what steps public and private sector businesses
are taking to improve their enterprise risk management efforts.

The chapter also highlights the studies, which include identification and management of
Credit risk, Interest rate risk, liquidity risk, and operational risk.

Credit Risk Management

According to Rufai (2013), credit risk is a huge problem to most banks and financial and
posited that credit risk can instantly provoke the failure of these establishments.

Fight (2004) credit risk is defined as the possibility that a bank's borrower will fail to meet
its obligations following the agreed terms.

Peterson et al (2008) asserted that the general fact that risks are unavoidable in any
investment of any sort is well accepted.

Colquitt (2007) advised that banks need to manage credit risk in the entire portfolio as well
as the risk individual credit or transaction.
Glantz and Mun (2011) insisted that the credit assets quality problem is one of the obstacles
limiting the development of private banks.

Interest rate risk Management

A bank can manage its interest rate risk in two ways. By matching the maturity and repricing
terms of its assets and liabilities and By engaging in derivatives transactions. When a
corporation is heavily geared and interest cover is minimal, interest rate risk is particularly
problematic, as an increase in interest rates could have a major negative impact on
profitability.

When investment expenditures are low, Mayers and Majluf (1984/37) indicate that
corporations can build up financial slack by reducing dividends. Managerial risk aversion,
according to Stulz (1948/50).

2.1.2. Types of Risks in the Banking Sector

Risk at the apex level may be visualized as the probability of a banks’ financial health being
impaired due to one or more contingent factors. While the parameters indicating the banks’
health may vary from net interest margin to market value of equity, the factor which can
cause the important are also numerous. For instance, these could be default in repayment of
loans by borrowers, change in the value of assets, or disruption of operation due to reasons
like a technological failure.

In the process of providing financial services, banks assume various kinds of risk both
financial and non-financial (Adarkwa, 2011). Financial risks include credit risk, market risk,
and liquidity risk that are directly related to the financial operations of banks. The non-
financial risks on the other hand indirectly affect the financial performance of banks. These
include strategic risk, political/country risk, reputational risk, operational risk, etc.

2.1.2.1 Financial Risk

Financial risk emerges from every business transaction in which a bank is exposed to the
possibility of loss. Credit risk, liquidity risk, and market risk are all subcategories of this risk.

Credit Risk

As part of all risks, Credit creation is the main income-generating activity for the banks.
However, this activity involves huge risks to both the lender and the borrower. The risk of a
trading partner not fulfilling his or her obligation as per the contract on the due date or
anytime. thereafter can greatly jeopardize the smooth functioning of a bank‘s business. On
the other hand, a bank with high credit risk has a high bankruptcy risk that puts the depositors
in jeopardy. Among the risk that face banks, credit risk is one of great concern to most bank
authorities and banking regulators. This is because credit risk is that risk that can easily and
most likely prompts bank failure (Basel, 2000).

Credit Risk is the potential that a bank borrower/counterparty fails to meet the obligations on
agreed terms. There is always scope for the borrower to default from his commitments for
one or the other reason resulting in crystallization of credit risk to the bank. These losses
could take the form of outright default or losses from changes in portfolio value arising from
actual or perceived deterioration in credit quality that is short of default. Credit risk is
inherent to the business of lending funds to the operations linked closely to market risk
variables. The objective of credit risk management is to minimize the risk and maximize a
bank’s risk-adjusted rate of return by assuming and maintaining credit exposure within the
acceptable parameters (Hempel and Simonson, 1999).

The instruments and tools, through which credit risk management is carried out, are detailed
below as documented in (Kanchu and Kumar, 2013).

A) Exposure Ceilings: The Prudential Limit is connected to Capital Funds – say 15% for an
individual borrower business, 40% for a group, plus 10% for infrastructure projects
performed by the company. The threshold limit is set at a lower level than prudential
exposure; substantial exposure, defined as the sum of all exposures over the threshold limit,
should not exceed 600 percent to 800 percent of the bank's capital funds (i.e. si).

B) Review/Renewal: Multi-tier Credit Approval Authority, Constitution-based delegation of

powers, more delegated powers for better-rated clients; discriminatory time schedules for
review/renewal, hurdle rates, and benchmarks for new exposures and periodicity for renewal
rating, among other things, are developed.

C) Risk Rating Model:- Create a comprehensive risk scoring system that ranges from six to
nine points. Define clear rating thresholds and assess the ratings regularly, preferably every
six months. To estimate the expected loss, rating migration must be mapped.

D) Risk-based scientific pricing: Link loan pricing and predicted loss. Borrowers in the
high-risk group will be charged a premium. Compile a database of default losses from the
past. Set aside funds to compensate for the unexpected loss.

E) Portfolio Management: The requirement for credit portfolio management stems from
the need to maximize the benefits of diversity while minimizing the possible negative impact
of exposures to a single borrower, sector, or industry. Set a quantitative limit on total
exposure to specified rating categories, as well as the distribution of borrowers across various
industries, business groups, and conduits.

F) Loan Review Mechanism: This should be done separately from credit transactions. It's
also known as a Credit Audit, and it includes a review of the sanctioning process, compliance
status, risk rating, detection of warning signs, and recommendations for corrective action to
enhance credit quality. It should target all loans above a given threshold, guaranteeing that at
least 30% to 40% of the portfolio is affected.

Liquidity Risk

Liquidity risk refers to the uncertainty about a company's capacity to unwind a position at a
low or no cost, as well as the availability of adequate funds to satisfy financial obligations
when they are due. Liquidity risk refers to the risk to earnings or capital posed by a bank's
ability to meet its obligations to depositors and borrowers by promptly converting assets into
cash.
Market Risk

These financial risks originate from the possibility of losses as a result of the future market
price or rate fluctuations. Price adjustments are frequently related to interest or foreign
exchange rate fluctuations, but they can also involve the cost of basic commodities that are
critical to the firm (Stavroula, 2009).

According to Saunders and Cornett (2006), market risk can be defined as the possibility of
loss to banks caused by changes in market variables. It is the risk to the bank's earnings and
capital due to changes in the market level of interest rates or prices of securities, foreign
exchange, and equities, as well as the volatilities of those prices. Thus, interest rate risk and
foreign exchange risk are the two types of market risk.

2.1.2.2. Non-Financial Risks

a) Strategic Risk:-The risk that occurs due to changes in behavior and activity of the
economic and financial environment in which it operates. Stavroula, (2009) defines strategic
risk as to the possibility that a failure at a firm, in a market segment, or to a settlement system
could cause a “domino effect” throughout the financial markets affecting one financial
institution after another or a “crisis of confidence” among investors, creating illiquid
conditions in the marketplace. The ‘’domino effect’’ refers to the risk hidden under the
interconnection of several sectors in the market and begins when the disorder of one firm or
one segment of the market can affect and cause failure in segments of or throughout the
entire financial system. The interconnection of obligations among the same institutions and
with the cash markets exacerbates that risk.

b) Reputational Risk:-The potential that negative publicity regarding the bank’s business
practices, whether true or not, will cause a decline in the customer base, or revenue
reduction.

c) Operational risk: - Operational risk is a financial risk because of potential operational

breakdowns in terms of people risk, process risks, and technology risks. These include
frauds, inadequate computer systems, control failures, operation failures, or natural disasters,
etc.
Operational risk is the risk of loss resulting from inadequate or failed internal processes,
people, and systems or external events, including legal risk. It is the potential financial loss
because of a breakdown in day-to-day operational processes. It can arise from failure to
comply with policies, laws, and regulations, from fraud or forgery. To mitigate this, internal
control and internal audit systems are used as the primary means (Basel Committee on
Banking Supervision, 2003).

Malfunction of the information systems, reporting systems, internal monitoring rules, and
internal procedures designed to take timely corrective actions or the compliance with the
internal risk policy rules result in operational risks (Bessis, 2010). Operational risks,
therefore, appear at different levels, such as human errors, processes, and technical and
information technology.

Since operational risk is an event risk, in the absence of efficient tracking and reporting of
risks, some important risks will be ignored, there will be no trigger for corrective action and
this can result in disastrous consequences. Developments in a modern banking environment,

such as increased reliance on sophisticated technology, expanding retail operations, growing

e-commerce, outsourcing of functions and activities, and greater use of structured finance
(derivative) techniques that claim to reduce credit and market risk have contributed to higher
levels of operational risk in banks (Greuning and Bratanovic, 2009).

d) Legal Risk: - Legal risks are risks associated with changes in the legal banking
environment. New regulation, new statutes, tax legislation, and court opinions can convert
previous well-performed transactions into struggles even when both sides have previously
cooperated adequately and are fully able to perform in the future. Additionally, legal risk can
arise from the activities of an institution’s management or employees. Fraud, violations of
regulations or laws, and other actions can result in big and dangerous losses. Moreover, there
exists a possible risk of loss due to an unenforceable contract or a total aversion of a
counterparty. Finally, there is also the possibility the contract be illegal or one of the parties
who entered into the contract not have the proper authority (Stavroula, 2009).
 e) Country Risk: - Country risk is the risk of a general crisis in a country stemming from
other, more specific, risks. Such risk is the risk of default (mainly in country debt) of
sovereign issuers, such as central banks or government-sponsored banks. Additionally,
deterioration of the economic conditions and the value of the local foreign currency in terms
of the banks base currency, legal restrictions, stop of currency convertibility and a market
crisis are the most popular risks that lead to a country’s unstable and risky economic life
(Brown and Moles, 2014 as cited in Biruk, 2015).

2.1.3. Factors influencing risk Management

Risk management in banking is theoretically defined as the logical development and
execution of a plan to deal with potential losses. There are some factors influencing risk
management these are:

1. Commitment and support from top management

2. Communication
3. Culture
4. Information technology
5. Organizational structure
6. Training and
7. Trust

2.1.4. Risk management and Profitability

Profitability is a measurement of efficiency and ultimately its success or failure. Profit is the
essential prerequisite of a competitive banking institution and the cheapest source of funds.
The success of a bank also depends on its ability to foresee and avoid risks, possibly to cover
losses brought about by risks arisen. Banks management includes minimizing the risks and
maximizing profitability.

2.2. Definition, Functions, and Roles of Banks

Banks are financial institutions that are principally linked to the acceptancy deposits and
advancing to borrowers (Gasu, Girardon, and Molyneux 2006)
In Ethiopia, the banking companies’ ordinance 1962 defines:

Banking means the acceptance for lending or investment of deposits of money from the
public repayable on demand or otherwise and withdrawable by cheque, draft, order, or
otherwise. (The Banking companies’ ordinance, 1962)

Considering the above definition the key role of the bank is to provide intermediation
services between depositors and borrowers. Such as to make deposits that can be withdrawn
on demand and to lend to Business organizations and individuals on request. Banking
institutions appear to be superior in several aspects in comparison with other financial
institutions.

In addition to the intermediation services, banks also offer a payment agency role to their
clients, by providing additional services in the shape of accepting cheques issuing the letter
of credit, and providing such other guarantees. (Heffernan 2005, and Mathews and
Thompson, 2008) all these points indicate that Banks facilitate Business activities and play
an important role in the economic development of a country.

Molyneux and Wilson 2007 highlight, Banks are of central importance for economic growth,
credit allocation, financial stability, and the competitiveness and development of
manufacturing and service firms.

Several studies highlight banking as one of the most complex endeavors in any economy that
faces a large number of financial and non-financial risks factors (Anderson2010 and Shafiq
and Nasr 2010 and Shafiqu, Hussain and Hassan, 2013 wood and killed, 2013 ). The nature
and complexity of these risks have changed rapidly over time and become more ominous for
not only operations banking but also Banks survival (Bessis 2002, Rahman, and Abdulah &
Ahmed 2012). It is imperative that banking institutions should not only be efficient but also
secure pastor 1999).

Hence, it is necessary for a bank to understand it is risks to exposures and to make sure that
these risks are adequately managed (Al Tamimia and Almazrooie 2007) Abu Hussein and
AlAjmi 2012) point out that the understanding of different types of risks is very important for
effective risks management in Banks and these institutions ought to accept only those risks
which are uniquely a part of their array of services. Therefore, not all risk management issues
are only important for the banking sector but are also vital for the overall growth of the
economy (Kao et al 2011).

2.3. Risk Management in Banks

Schmit and Roth (1990) describe risk management as the accomplishment of different
activities formulated to reduce the adverse effect of uncertainty regarding potential losses.
Green (1992) explains risk management in banking institutions as mixtures of policies,
procedures, and persons, adopt to control the potential losses. Santomer (1997) mentions four
steps of the risk management process, which include Standards and Reports, position limits
or rules, investment guidelines or strategies, and incentive contacts and compensation.

Bessis (2002) characterizes risk management as the complete set of the risk management
processes and models permitting banking institutions to put in place different risk-based
procedures and practices. According to him, risk management contains all the tools and
methods necessary for measuring, monitoring, and controlling different risks. Schroeck
(2002) describes the concept of risk management as:

An active, strategic, and integrated process that encompasses both the measurement & the
mitigation of the risk, with the ultimate goal of maximizing the value of a bank, while
minimizing the risk of Bankruptcy.

2.4. Rationales for Risk Management in Banks

The available literature provides many theoretical considerations to justify the adoption of
risk management in the banks including the financial-economic approach, institutional
theory, agency theory, and stakeholder theory (Stulz 1984, Smith and Stulz 1985, Chornel
and Shapiro 1987. fit, Plfiderer 1995, Santomero,1995, Smithson, Smith and Wilford 1995,
Oldfield and Santomero 1997, Tufano 1998. Fatemi and Luft, 2002; Klimczak, 2007;
Collier and Woods, 2011; Hudin and Hamid, 2014). The following sub-sections discuss
some important theoretical considerations in this regard.
2.4.1. Financial Economics Approach
The financial economics approach is based on the classic Modigliani-Miller paradigm
(Miller and Modigliani, 1958) that proposes the conditions for irrelevance. In 1984, Stulz
conducted a study on the Optimal Hedging Policies and is the first person to present a
feasible economic reason for why managers involve themselves in both predicted profit as
well as in the variability around their values (Santomero, 1995). He deduces the rationales for
risk management in firms based on the irrelevance conditions. After that several alternative
propositions, as well as justifications, have been developed to rationalize risk management.
From the past few decades, there is increasing literature on the different reasons for risk
management and some notable contributions are the research works of Santomero (1995),
Smithson, Smith, and Wilford (1995), and Oldfield and Santomero (1997). Santomero has
presented a detailed review of the relevant literature (1995) in his research work on Financial
Risk Management. The Whys and How’s and points out different distinctive motives for risk
management including (i) securing internal financing (ii) tax effects (the non-linearity of
the tax structure); (iii) the cost of financial distress; and (iv) capital market imperfections.
According to the first motive, the managers of a firm have limited resources and the ability to
spread out the investment in the firm because of limited capital as well as the Concentration
of human capital returns. This promotes aversion to risk and a priority for stability in the
firm. For instance, it is observed in the second motive that the conventional tax burden is
decreased by controlled volatility in the disclosed taxable income due to the progressive tax
schedules. Whereas, the third and fourth motives concentrate on the issue that a decrease in
the profitability of a firm has an additional proportionate impact on its fortunes. Oldfield and
Santomero (1997) advocate:

Any one of these reasons is sufficient to motivate management to concern itself with risk and
embark upon a careful assessment of both the level of risk associated with any financial
product and potential risk mitigation techniques. (Oldfield and Santomero, 1997, p.4)

Smithson, Smith, and Wilford (1995) have written a textbook on Managing Financial Risk
and devoted a complete chapter to persuading risk management in financial institutions as a
value-boosting strategy by endorsing the arguments highlighted above. All the above-cited
studies indicate that one or more concerns, such as securing internal financing, tax effects,
the cost of financial distress, and the capital market imperfections, rationalize the adoption of
risk management in banks. Hence, the ultimate goal of risk management activities (hedging)
is to maximize the firm value.

2.4.2. Institutional Theory

Institutionalization refers to, “the process through which components of formal structure
become widely accepted, as both appropriate and necessary, and serve to legitimate
organizations” (Tolbert and Zucker, 1983, p.25). Several branches are involved in
institutional theory (Collier and Woods, 2011). However, several studies work (Meyer and
Rowan 1977; Tolbert and Zucker, 1983; DiMaggio and Powell, 1983; Scott, 1995 and
Powell and DiMaggio, 1991; Collier and Woods, 2011; Hudin and Hamid, 2014) are more
related to the business and organizational studies. The institutional theory focuses on the
rules and regulations which are forced on institutions by the outsiders, particularly by the
government regulatory bodies; and all the norms and values which are incorporated in roles
by means a part of socialization processes or procedures (Meyer and Rowan 1977;
DiMaggio and Powell 1983; Scott 1995; Powell and DiMaggio 1991).

2.4.3. Agency Theory

Different researchers have used agency theory in their studies to provide a theoretical base
for risk management (Smith and Stulz, 1985; Fite and Plfiderer, 1995; Tufano, 1998; Fatemi
and Luft, 2002). This theory helps to examine a social phenomenon from a principal-agent
(investor-manager) perspective. Jensen and Mackling (1976) describe this agency
relationship as:

A contract under which one or more persons (the principals)) engage another person (the
agent) to perform some service on their behalf, which involves delegating some decision-
making authority to the agent.(Jensen and Mackling, 1976, p.308)

This theory has two fundamental assumptions (Jensen and Mackling 1976). Firstly, the
principal, as well as the agent, pursue to maximize their interest. Secondly, the interest of the
agent may diverge from the interest of the principal and the agent is not likely to perform in
the best interest of the principal. Hence, a conflict of interests may emerge between principal
and agent.

2.4.4. Stakeholder Theory

The stakeholder theory (Freeman, 1984) focuses clearly on the symmetry of stakeholders’
interests as the foremost determinant of corporate policy. The most important contribution
towards risk management is an addition of implicit contracts theory from employment to
other contracts (Cornell and Shapiro, 1987; Klimczak, 2007). In certain businesses, mainly
services, and high-tech industries, customer confidence in firms is very important to carry on
offering their services in the future and can considerably contribute to firms’ values. On the
other hand, the value of such implied claims is extremely sensitive to estimated costs of
bankruptcy and financial distress. Since the risk management practices in a company induce
a reduction in these estimated costs, its value increases (Klimczak, 2007).

Hence, the above discussion implies that the risk management can be seen in banking
institutions: to fulfill the regularity requirements; to align the interests of managers with their
shareholder's interest; to reduce expected tax payments of the bank; to lower the probability
of financial distress, business failures or bankruptcy, to safeguard specific investments of the
organization; to help the banking business organization in developing financial plans and
investment activities, and to maximize the shareholders, the value of the bank. In addition, it
is also obvious from the above-mentioned propositions that risk management is also useful
within a bank to control different kinds of risks and mitigate the possible negative effects of
these exposures.

2.5. The Process of Effective Risk Management

Hopkin, (2010) indicates that historically, the term risk management has been used to
describe an approach that was applied only to hazard risks. However, it is developed to cover
the improved management of control Risks and opportunity risks. The process of risk
management can be summarized in seven steps (7 steps)
The first step: according to this process is recognizing the risk or identification of risks along
with their nature and the circumstances in which it could materialize. After recognizing the
risk that has an impact on our objective.

Second step: is Ranking or evaluation of risks in terms of magnitude and likelihood to

produce the ‘risk profile’ that is recorded in a risk register.

Third step: as resources are limited, it is not possible to handle all identified risk, and
therefore, responding to significant risks, is the third steps that include the decisions on the
appropriate action.

Fourth step: Resourcing controls to ensure that adequate arrangements are made to introduce
and sustain necessary control activities.

Fifth step: Then after, Reaction, which means planning and/or event management.

Sixth step: Reporting and monitoring of risk performance.

Seventh step: Reviewing the risk management system, including internal audit procedures
and arrangements for the review and updating of the risk architecture, strategy, and protocols.
When we came to the ranking, different scholars use different approaches to denote the
degree of severity of identified risks. Some groups classify risks into five while others into
four but, the most common one is to categorize all risk issues into three groups that use the
traffic light system Red, Yellow, and Green. (Red, Yellow, and Green).

The Red means ‘stop’ it is either a bad threat or a great opportunity; therefore, priority should
be given to these risks.

Yellow indicates ‘be careful’ ‘think twice before you act that indicates management should
monitor these risks as the situation may convert them to red or green. And

The Green one indicates to hurry up as there is none or minimal danger or opportunity –
management can seldom review them for their status. (Taken from the lecture of Dr. David
Hillson at Munich in June 2006). As we have discussed earlier, risk can be positive or
negative, which means we have to prepare two Probability Impact Matrix, one for
the Threat that results in negative impact and one for the Opportunity that results in
positive impact. By putting these two matrices in a mirror wise as Hillson, (2006) puts it.

2.6. Benefits of effective risk management

Effective risk management helps a company to reduce the negative and enhance the positive
impacts of risks and a company to sustainable stay in business. A company that has effective
risk management thereby assist the can make informed decisions; exploiting can increase the
likelihood of successful risk-taking. i. e. opportunity risks; can protect its reputation/
goodwill; can improve the quality and reliability of its products and services; can increase the
likelihood of achieving strategic goals or objectives; can reduce costs and/or increase profits;
can reduce failure or downtime; and above all can properly utilize competitive Osborne,
2012).

2.7. ESTABLISHING CONTEXT OF RISK MANAGEMENT

It is necessary to have a contextual reference to a firm status to understand the nature and
character of the internal and external risk faced by a Bank/organization. Hence, it will be the
first step to assess the internal and external environment. The internal environment is the
context in which other components of a Bank's risk management are applied because the
internal environment of the bank possesses a significant impact on how the Bank's risk
management is implemented and executed. Particularly an entity is expected to develop a risk
philosophy at this primary stage of the Banks risk management process that expresses the
sets of shared beliefs and attitudes characterizing how the entity considers risks in each
business operation of an entity that is highly integrated with the entity risk culture (COSO,
2004).

In addition, establishing a context regarding integrity and ethical values of the people who
create, administer, and monitor entity functions essential for the development of a transparent
Bank risk Management framework that ensures accountability on each risk management
activity. Individual experiences such as value judgments, attitudes should be addressed in a
code of conduct that expresses an entity's statement of position on integrity and ethical value
(COSO, 2004).

At this stage of the bank, risk management process it is essential to set the risk appetite and
tolerance limit that will apply to entities' strategic objectives (COSO, 2004). Similarly,
insurers develop a risk management policy that contains a well-defined risk preference, risk
appetite, risk tolerance limits along with the escalation procedures then the limits are
approached or breached. Risk management policy should also include portfolio risk
assessment of assets and liabilities, performance measurement based on risk-adjusted returns,
and communication by management of the risk responses and metrics for the organizations
(AAA, 2013).

2.8. RISK IDENTIFICATION AND ASSESSMENT

According to Enterprise Risk Management Committee (2003) insurers may use a different
kind of mechanism, for documenting the material threats faced by an organization that poses
risk to the organization's objectives, such as surveys, internal workshops, brainstorming
sessions, and internal auditing. Moreover, it a mechanism by which in identifying the
competitive advantages that can be exploited to achieve organizational value. In order to
ensure the effectiveness of the risk management process, it is important to primarily define
and understand the risk an insurer is exposed to Particularly the range of risks faced by
insurers that emanate from the assets of the organization; the liabilities generated
underwriting the insurance risks and the strategies and operations of the organization itself
(AAA, 2013).

Internationally many insurance organizations consider adopting and conducting periodic

senior management workshops that serve as a qualitative assessment of risk, with the support
from the information on risk registers, surveys or interviews and established common risk
language (ERMC, 2003).

2.9. RISK INTEGRATION AND PRIORITIZATION

The Causality Actuarial Society (CAS) describes the process of integrating risk as to the
expression of aggregate risk distribution and the portfolio effect in terms of impact on
enterprise key performance indicators which is called the aggregate risk profile (Enterprise
Risk Management Committee, 2003).

Several risk exposure of an organization especially in the financial sector, are highly
correlated. It is one of the major effects of ERM to capture these correlations. For instance,
interest rates and inflation rates often are said to generate a cause-and-effect relationship to
common higher-level inputs (ERMC, 2003).

It is necessary to develop a separate impact and likelihood of occurrence of each risk

exposure in order to form an aggregate risk profile that serves as a „risk map‟ to give
management the state of condition and future expectations for their organization regarding
the wide range of risks across all functional units of an organization (ERMC, 2003).

Risk profiling is necessary to provide insurers a systematic way of recording and reporting
that facilitates common understanding and articulation of risk (IAA, 2009). According to the
International Association of Insurance Supervision (2007), Risk profiling is not a stale or
one-time activity but requires frequent maintenance to be mindful about the potential risks
and their related impact and likelihood effect on the aggregate risk profile. A risk profile
serves as a snapshot of management information about the top 10 risk exposures (IAIS,
2007).

2.10. Conceptual Framework

A conceptual framework is an outline that depicts a researcher understanding of literature
and his way of explaining a phenomenon. It charts out the possible actions to be performed in
the study supported by other researchers’ knowledge and his viewpoint supported by his
observations on the subject of research. Thus, the conceptual framework is a depiction of the
researcher’s view of how the constructs of his study are related to each other (Regonial
2015). According to McGaghie et al. (2001), the conceptual framework “Prepares the stage”
presents a research insight that helps him go ahead based on the problem statement.
 Independent Variables

Understanding Risk Management (URM)

Dependent variable

Assessment OF (AR)

Risk Management Practices

Risk Identification (RI) (RMP)

Risk Monitoring (RM)

Risk Analysis (RA)

Figure 1 Developed by Researcher Based On Literature Review

CHAPTER 3: RESEARCH METHODOLOGY

3.1. introduction
According to Creswell, “research is a cyclical process that begins with problem
identification, continues with a review of pertinent literature, defines the purpose and
methods of study, and concludes with the production of a report that is evaluated and used by
others.” He states that quantitative methods are applied, particularly when a more in-depth
understanding of the issue is required. (Creswell & Poth, 2016), (Denzin & Lincoln, 2005).
defined qualitative research as a study that includes a series of material and interpretive
practices that help the audience better understand the issue at hand. A qualitative researcher
will examine an issue in its most natural setting and make an effort to comprehend it from the
perspective of others. Qualitative research is therefore appropriate for this thesis. The
following sections discuss the methodology to be used in this study, which includes the
following: Research design; Research to Variables to be used in the study; Conceptual
framework; Population and sample determination; and Data types, sources, and method of
analysis.

3.2. Research Design

The study approach is exploratory as it seeks to explore the practice of the credit risk
management process, considerations given to human skill varieties, as well as the methods
employed by CBE in handling credit risk management. The objective to use an exploratory
approach is to generate more information about the situation of credit risk management
practice, to define clearly the research question in the form of investigative questions, and for
an in-depth contextual analysis as the study focus on credit risk management practice.

3.3. Source of Data

In this study, the researcher will use a primary source of data supplemented with a secondary
source of data. The primary data will be collected through questionnaires and interview while
secondary data will be collected from different books, journals, unpublished thesis, websites,
and annual reports, policies, and procedures of the bank. The structured questionnaire will be
constructed in four categories in order to describe the background information, strategic
attention, and consideration given for credit risk management practice in private Banks,
review the credit risk management process and techniques of private sector banks and
explore the considerations given to human resource skill Variety in order to successfully
manage credit risk. The questionnaire is open and close-ended. The open-ended question
offers the respondents the opportunity to freely express themselves on the issues under
consideration while the close-ended questions restrict the respondents on the options
provided. The researcher will be developed the questionnaire in some parts my own and
customizing previously used by Nigussie, (2016) and Tesfaye, (2016). Meanwhile, the
interview part consists set of questions on the role of the Board and senior management in the
oversight of credit risk management.

3.4. Sampling Design/Sample Size & Sampling Technique

To explore the credit risk management practice of private sector banks, it is rationale to
consider credit process employees in the head office particularly credit analysts, Experts,
Managers, and Directors in the same process. Because many of the credit requests of private
sector banks are now being processed in the central head office. Therefore, in this central
office, there will be closer to 100 employees of which all of them will be taken as samples
for this study. Since Credit risk management by its nature needs detailed knowledge and
skill, it is necessary for the researcher to deal with those people who are convenient and are
subjected to Credit risk management so as to get the necessary information for the study.

The sampling method used to determine sample size and sample units is a non-random
sample technique called convenience sampling technique because the researcher believes that
it is very important to distribute questionnaires through walk-in around, then randomly so as
to get filed each questionnaire properly and collect on time. Furthermore, this convenience
sampling is used in order to generate the data from the employees that are directly engaged in
the operation of the credit risk management business of the bank. Because a very reliable
source of information will be gathered.

3.5. Instruments of Data Collection

In this study, the researcher will use a primary source of data supplemented with a secondary
source of data. The primary data will be collected through questionnaires and interview while
secondary data will be collected from different books, journals, unpublished thesis, websites,
and annual reports, policies, and procedures of the bank. The structured questionnaire will be
constructed in four categories in order to describe the background information, strategic
attention, and consideration given for credit risk management practice in private Banks,
review the credit risk management process and techniques of private sector banks and
explore the considerations given to human resource skill Variety in order to successfully
manage credit risk. The questionnaire is open and close-ended. The open-ended question
offers the respondents the opportunity to freely express themselves on the issues under
consideration while the close-ended questions restrict the respondents on the options
provided. The researcher will be developed the questionnaire in some parts my own and
customizing previously used by Nigussie, (2016) and Tesfaye, (2016). Meanwhile, the
interview part consists set of questions on the role of the Board and senior management in the
oversight of credit risk management.

A questionnaire refers to all the techniques for data collection in which every respondent is
asked to respond against written series of questions, presented in a prearranged order (De
 Vaus, 2002; Saunders, Lewis and Thornhill, 2012). It is an efficient method to collect data
when the investigator can specify what data is required and how the specific variables are
computed (Sekaran and Bougie, 2013). The questionnaire is a very useful and widely
accepted method to collect precise data in a cost-effective way from a large population in
business and management research (Cooper and Schindler, 2011; Saunders, Lewis, and
Thornhill, 2012).

This study has adopted the survey questionnaire technique to collect required data for
quantitative analysis and based on the following important considerations:

 It is very helpful in the context of this research because firms generally publish few
details about their risk management practices in the annual reports (Al-Tamimi and Al-
Mazrooei, 2007; Abu Hussain and Al-Ajmi, 2012)
 It is the most efficient method to approach the target respondents within the banking sector of
Gode by remembering that it is possible to contact them more efficiently through a
questionnaire;

3.2. Variable Definition and Survey Instrument

In developing a causal model and testing the association hypotheses, there are two kinds of
variables involved: dependent and independent variables. An independent variable is the
presumed cause, whereas a dependent variable is the presumed effect (Pedharzur and
Schmelkin, 1991, p.177). Following is a more detailed consideration of the dependent and
independent variables defined and utilized in this study.

3.5.1. Dependent variables

Zikmund et al. (2013, p. 131) define a dependent variable as a criterion or a variable that is to

be expected or explained by other variables. the dependent variable in this study is Risk
management Practices

3.5.2. Independent variables

Zikmund et al. (2013, p. 131) defined an independent variable as a variable expected to
influence the dependent variable. In this study, the independent variables involved include
(Risk management Practices, Assessment of Risk, Understanding Risk Management, Risk
Identification, Risk Analysis and Risk Monitoring and Control).
3.6. Model development
According to Pattillo (1980), in general, a model is a representation of real-world phenomena
as they exist (descriptive models) or as they ought to exist (normative models). A model is
defined as any highly formalized representation of a theoretical system, usually designated
through symbols (Davis, 1996, p.300).
Davis (1996, p. 301) emphasized the importance of models to decision-makers as follows:
“Models are extremely important to decision-makers because they form the basis for the
development of a decision support system.”

The generalized mathematical model form can symbolically be represented as follows:

OI = f (Ai, Bj) (Eq. 4.1)

Where:
OI = outcome information or objective from the model to be used by the decision-maker
or the dependent variable
Ai = controllable, independent decision variables in the process being modelled
Bj = uncontrollable independent variables influencing the process being modelled, or the
environment variables
f = functional relationship between the outcome information variable (the dependent
variable) and Ai and Bj’s independent variables (Davis, 1996, p. 303).

Based on the generalized mathematical model form as indicated by Davis (1996) and
using the variables defined above, the model the study can be formulated as follows:

RMP = f (RMP, AR, URM, RI, RA) ………………………………………. (Eq. 4.2)

Where,
RMP i- = Risk management Practices
AR = Assessment of Risk
URM = Understanding Risk Management
RI = Risk Identification
RA =Risk Analysis
RMC = Risk Monitoring and Control
In these models, by making some standard assumptions, the above equation can be
restructured into linear multiple regression equations as follows:
 RMP = b0 + b1 AR +b2 URM + b3 RI + b4 RA +b5 RMC + e1 (Eq. 4.3)

Where:

bi & bii ( I= 0,1,2,3 …) are the coefficients, ε is the error variable, RMP is the dependent
variable related to quality of financial reporting, and AR, URM, RI, RAand RMC are
independent variables.
The required assumptions of this multiple regression model are that

1. All the variables are continuous.

2. The relationships between the dependent and independent variables are linear,
3. There are no significant outliers in the data series.
4. Errors are independent (there is no relationship between the independent variables
and the residual variable).
5. The dependent variable has the same variance for all the values of the independent
variables (the assumption of homoscedasticity).
6. The residual variable is approximately normally distributed.
7. The independent variables are not strongly correlated with one another (we don’t
have important multicollinearity).

The mathematical model mentioned earlier may be described by the visual model as in
Figure 4.1 below.
Figure 2 Analytical model for the research study

Independent Variables:
Assessment of Risk
Understanding Risk Management
Risk Identification
Risk Analysis Dependent Variables
Risk Monitoring and Control Risk management Practices

Source: Developed for the study

3.7. Method of Data Analysis
Data analysis in different research designs relates to the type of research method chosen for
the study. The specific method applied in this study was the quantitative method. Therefore,
quantitative data from a survey source were analyzed using descriptive and inferential
statistics. Descriptive statistics such as means, frequency, tabulation, and cross-tabulation
were used, whereas Correlation analysis, specifically Pearson correlation, to measure the
degree of association between the variables under consideration. In addition, ordinary least
square (OLS) was conducted to determine the most significant and influential explanatory
variables affecting the dependent variable. Then, the results of both descriptive and
inferential statistics results were presented by appropriate graphs and tables. IBM SPSS
(Statistical Package for Social Sciences), version 26, was used to carry out statistical
calculations. The mean was to be judged with the Likert scale (5) from “Strongly Disagree”
=1 to “Strongly Agree” =5. Moreover, the data presented with the help of figures and tables
were interpreted and summarized to draw conclusions and forward recommendations.

3.8. Ethical consideration

Before starting the actual data collection, the purpose of the study, the right to participate and
refuse was told to the study subjects. Confidentiality of the information was guaranteed by
not writing their name and anything that enabled them to identify study participants. In
addition to that, a respondent’s answer will be kept in a confidential place. According to
ethical standards, the researcher will act responsibly to ensure that the information gathered
was not brought to disrepute. All respondents were informed that they have the right to
privacy and safety, know the researcher’s true purpose, obtain research results, and abstain
from answering questions (Aaker et al., 1995).
 Work plan
Duration: March-June
July August September Octobe
r
TASKS TO BE PERFORMED

Week1&2
Week 3
Week4

Week1
Week2

Week3
Week4
Week1
Week2
Week3
Week4
Week1
S.NO

1 Proposal writing X
2 Writing literature review X
3 Proposal presentation X
4 Writing literature review
5 Questionnaire writing X
6 Questionnaire distribution X
7 Collection of the Questionnaire X
8 Data analysis interpretation X X
9 Writing summary, conclusion & X
recommendation
10 Submission of final project X
11 Presentation of the project X
Budget breakdown

No Item Measurement Price/Unit Unit Total price Remark

Investigators (3)1 Per-diem per day 250.00*3 45 days 33750.00

Stationary 3,500.00

Secretarial 2,500.00

Sub total 39,750.00

Contingency (15%) 5962.50

Grand total 45,712.50