Importance Of Risk Management In Banks

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According to Hussein and Tamini (2007), risk management is the foundation of the banking practices. Due to the nature of the business banks, operate in a volatile environment facing a huge amount of risks associated with credit, market, operations, reputation, foreign exchange and liquidity. So adopting effective risk management practices by banks to face such risks successfully is a vital thing. Thereby the study investigates risk management practices on profitability of banking sector in Sri Lanka, particularly LCB’s. Banks have to manage more types of risks in order to maximize the shareholders’ wealth. Factors influenced to risks can be categorized into two fold; mainly internal and external. Internal factors are the bank specific factors…show more content…
Today, there are new entrants into the market and smaller banks are offering various products and services to customers in feasible manner and gaining few profit margins. It is mainly due to attract businesses from other competitors in the market. Loans are the major assets, which derive a higher income source to any bank. Therefore, Loan products always give a risk and reward to the bank. Since the competitors is high among banks, they tend to create flexible terms to their credit evaluation process rather than quality lending to retain existing customers and canvass more business which will finally lead to high growth of Non- Performing ratio. High levels of non-performing loans linked with bank failure and crisis in the financial industry. Failure of one bank will impacts completely on banking industry. The bank recorded moderate growth in loans and advances. This was attributable to the relatively high liquidity in most of the banks. The bank experienced an increasing trend in non-performing advances during the…show more content…
According to CBSL, banking employs more than 60,000 employees and the volume of transactions in terms of monetary value has been growing at an average of 10.5% per year from hopes that banking sector should grow by 8% in the next 20 years to help the country achieve its goal. This is only done if there is growth and stability in the financial sector and the cases of insolvency of institutions or financial crisis occurs should be avoided at all costs. Risk management helps to reduce the chances that a bank can become insolvent if sudden shocks occur. The Central Bank of Sri Lanka (CBSL) reported that more than 90% of the country's banks reported losses reduced due to the management of risk and that nearly all reported awareness of risk had increased in their institutions. To the researcher’s best knowledge there is limited empirical evidence on the relationship between risk management and performance of commercial banks in Sri Lanka. This study seek to fill the existing research gap by answering the following research question, does there exist a relationship between risk management and profitability of commercial banks in Sri

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