Risk Management and Profitability of Commercial Banks A Case Study of Salam Bank in Mogadishu, Somalia

ABSTRACT 

The study sought to assess the effect of risk management on profitability of commercial banks in Mogadishu-Somalia. It was guided by three specific objectives, that included i) determining the effect of risk identification on profitability of commercial banks in Mogadishu Somalia; ii) examining the effect of risk assessment on profitability of commercial banks in Mogadishu Somalia and (iii) to establish the effect of risk monitoring and control on profitability of commercial banks in Mogadishu Somalia. This research employed a descriptive research design to describe the variables, the questionnaire and interview guide were used as the research instruments. Descriptive statistics were used in this study included frequencies, means and regression analysis on variables. The findings revealed the following: The findings indicated that risk identification significantly affects the profitability of commercial banks in Mogadishu Somalia (sig=0.000 and F-value= 84.756), the findings revealed that there is a significant effect risk assessment has on profitability of commercial banks in Mogadishu Somalia (sig=0.000 and F-value= 71.395), findings of this study proved a positive significant effect risk monitoring and control has on profitability of commercial banks in Mogadishu Somalia (sig=0.000 and F-value=93.669). Still the researcher concluded that; risk identification has a considerably high influence on the profitability of the commercial banks, hence there is need for improving the risk identification s to enhance profitability, risk assessment has a significant effect on profitability of commercial banks in Mogadishu Somalia and this indicates that risk assessment has a high bearing on profitability of the commercial banks, and finally risk monitoring and control has a positive significant effect on profitability of commercial banks in Mogadishu Somalia and hence indicating that risk monitoring and control has a bearing on the profitability hence there is need for enhancing monitoring given the state of the profits though other factors complemented in the study. The researcher recommended that: there is need to enhance risk identification through improving the mechanism for categorizing risks as the strategy for enhancing profitability. The process of risk identification in commercial banks should be very comprehensive covering all departments and sections as this will enable management to effectively implement risk identification strategies. Commercial banks in Mogadishu should look at other factors that directly affect profitability. These include availability of qualified personnel to implement risk management, the level of technology applied and the effect of changes in demand. The study contributed to new knowledge through the following; one of the most prominent findings from this study is the fact that it has provided evidence to support the fact that risk management can improve the state of profitability of the commercial in Mogadishu Somalia.

TABLE OF CONTENTS

DECLARATION................................................................................. ii

APPROVAL...................................................................................... iii

DEDICATION .................................................................................. iv

ACKNOWLEDGEMENTS..................................................................... v

CHAPTER ONE .................................................................................1

INTRODUCTION ..............................................................................1

1.0 Introduction...................................................................................................1

1.1 Background of the study.................................................................................1

1.1.1 Historical Perspective...................................................................................1

1.1.2 Theoretical Perspective ................................................................................4

1.1.3 Conceptual Perspective ................................................................................5

1.1.4 Contextual Perspective.................................................................................6

1.2 Problem Statement.........................................................................................6

1.3 Purpose of the study ......................................................................................7

1.4 Specific Objectives of the study......................................................................7

1.5 Research Questions ........................................................................................7

1.6 Hypothesis.....................................................................................................7

1.7.0 Scope of the study.......................................................................................7

1.7.1 Geographical Scope .....................................................................................7

1.7.2 Content Scope.............................................................................................8

1.7.3 Time Scope.................................................................................................8

1.8 Significance of the study.................................................................................8

1.9 Operational definition of Key terms..................................................................9

CHAPTER TWO .............................................................................. 10

LITERATURE REVIEW..................................................................... 10

2.0 Introduction................................................................................................. 10

2.1 Theoretical Review ....................................................................................... 10

2.2 Conceptual framework.................................................................................. 12

2.3 Review of related Literature .......................................................................... 13

2.3.1 Effect of risk identification on profitability.................................................... 13

2.3.2 Effect of risk assessment on profitability of organizations ............................. 14

2.3.3 Effect of risk monitoring and control on profitability of organizations ............ 17

2.5 Research Gaps ............................................................................................. 20

CHAPTER THREE ........................................................................... 21

METHODOLOGY............................................................................. 21

3.0 Introduction................................................................................................. 21

3.1 Research design........................................................................................... 21

3.2 Population of the study................................................................................. 21

3.3 Sample Size ................................................................................................. 22

3.3.1 Sampling Procedure................................................................................... 22

3.3.2 Sample Technique ..................................................................................... 22

Primary source................................................................................................... 23

3.5 Data collection instrument ............................................................................ 23

3.5.1 Questionnaire............................................................................................ 23

3.5.2 Interview Guide......................................................................................... 23

3.6 Validity and Reliability................................................................................... 24

3.6.1 Validity ..................................................................................................... 24

3.7 Data Gathering Procedures ........................................................................... 25

3.7.1 Before the administration of the questionnaires........................................... 25

3.8 Data Analysis ............................................................................................... 25

3.8.1 Qualitative data......................................................................................... 25

3.8.2 The quantitative data................................................................................. 25

3.8.3 Decision rule ......................................................................... 26

3.9 Ethical consideration..................................................................................... 26

CHAPTER FOUR ............................................................................. 27

DATA PRESENTATION, ANALYSIS AND INTERPRETATION................ 27

4.0 Introduction............................................................................. 27

4.1 Demographic characteristics of the Respondents ........................ 27

4.2 Risk management..................................................................... 28

4.3 Profitability .............................................................................. 31

4.4 Objective one; effect of risk identification on profitability of commercial banks in Mogadishu Somalia ............ 34

4.5 Objective two; the effect of risk assessment on profitability of commercial banks in Mogadishu Somalia..................... 35

CHAPTER FIVE............................................................................... 38

DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS.................. 38

5.0 Introduction............................................................................. 38

5.1 Discussions ..................................................... ……………………...38

5.2 Conclusions.............................................................................. 40

5.2.2 Objective two; the effect of risk assessment on profitability ..... 40

profitability .................................................................................... 41

5.3 Recommendation ..................................................................... 41

5.6 Areas for further research......................................................... 43

REFERENCES ................................................................................. 44

Appendix i: Research Questionnaire ................................................ 49

Appendix ii: Interview Guide for Administrators................................ 53

Appendix iii: Table for determining the sample size.......................... 54