The Effect of Risk Management on the Performance of Banking Institutions: a Case Study of Diamond Trust Bank, Main Branch

Abstract

The aim of the study was to establishing the effects of risk management on financial performance in banking institutions and was conducted at Diamond Trust Bank, main branch. The study objectives were to: assess the risk management practices in the banking institutions, establish the level of financial performance of banking institutions and establish the relationship between risk management and the performance of banking institutions.

The study took a case study research design where both qualitative and quantitative research approaches were employed. 50 employees of Diamond Trust Bank acted as respondents. During the study both primary and secondary data was collected. Primary data was collected from the respondents who were employees of Diamond Trust Bank where as secondary data was collected from the internet, documentary reviews, journals and other publication. Data was analyzed with the help of Excel and presented in frequencies tables, as well as on graphs.

The study findings indicated that Diamond trust Bank does not possess a risk management department and besides that the bank has a centralized decision making system about risk management policies in all its branches. This impedes managers from making financial decisions depending on the type of clients they deal with but they are rather forced to making decisions depending on the general bank policies and IT systems which are vital in data collection and analysis are not being used. It was found out that financial performance level of profitability of Diamond Trust Bank is not up to the expected level; although the company is making profits, its level of profitability is not up the required level; the company sometimes generates positive economic profits but are not as regular as it should be.

The study concluded that there is a positive relationship between risk management and financial performance of banking institutions. Poor risk management practices such as centralized decision making about risk makes some branches to lose out on potential clients. It was recommended that banking institutions need to refocus more on risk management, and that top management in banking institutions should try as much as possible to ensure that they build a risk management culture among all employees. Decentralization of decisions regarding risk management needs to be encouraged. By doing this, different branches would not have to miss out on some clients.

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