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=O.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=O.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 prominer~t 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

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, CONLUSIONS 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