The effect of risk management on the performance of financial institutions in Uganda: Case study Ecobank Uganda (head office Kampala)

Abstract

The development of the banking industry globally and any business venture regardless of their temperament and management encounter various kinds of risks in their operations. Risks being one of an- predictable part of any business, require a well-developed strategy of risk management to take lead and many financial institution are still faced with the challenge of risk management in spite of having staff with skilled knowledge. However, Michel Crouhy et al (2007) clearly stated that institutions can comfortably earn their keep by taking lead in risk management. This research has therefore looked at the effect of risk management on the performance of banking institutions in Uganda with specific emphasis on ECOBANK UGANDA head office. The study examined the existing literature on the topic under study and the empirical data required was obtained through questionnaires, review of records and interviews with the staff and customers and other stakeholders respectively. The data was analyzed both qualitatively and quantitatively to ascertain the effect of risk management in financial institutions (Eco bank). The key findings of the study show that the major risks encountered by financial institution are; credit risk, liquidity risk, foreign exchange risk, interest rate risk and operational risk. This is due to the fact that banks provide a myriad of services and involve themselves in many transactions hence being exposed to all these risks. The findings showed that the lack of a well-developed risk culture at Ecobank was the biggest challenge in managing risks. The statistical analysis clearly showed that there is strong relationship between risk management and performance of financial institutions especially with regard to the return on equity, return on assets, profitability and net interest margin. The study therefore, concludes and recommends that to ensure efficient and effective risk management in financial institutions; the management needs to improve of staff capacity development, communication channels, development of strong risk culture, formulation of risk management policies, constant review of the operations, imparted into the stakeholders of the bank (customers and shareholders), installation of CCTV camerasin sensitivity areas. Therefore, a lot of efforts need to be put in by all staff of the organization to effectively enable the management of various risks encountered by the organization.