IIARD International Institute of Academic Research and Development

INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT (IJEFM )

E-ISSN 2545-5966
P-ISSN 2695-1932
VOL. 8 NO. 5 2023
DOI: 10.56201/ijefm.v8.no5.2023.pg72.86

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Impact of Key Bank Risk Components on Banking System Performance in Nigeria: A Discriminant Analysis Technique

Nwaoha, William Chimee, Onwuka, Onwuka Okwara, Akandu, Victor Chigozie, Chukwu, Maurice Kalu, Ikoro, Uzoma Eunice

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Abstract

Using discriminant analysis technique, this study evaluates the impact of key bank risk components on the banking system performance in Nigeria. The performance of the banking sector was evaluated to determine the extent to which each of the key risk components impacts on it. The findings revealed that credit risk, compliance risk and liquidity risk made outstanding contributions of 95.6 percent to the total discriminant score for the function, implying that successful performance of banking sector hinges mostly on the three risk factors. Credit risk contributed 39.1 percent of the total discriminant score; compliance risk scored 38.1 percent while liquidity risk made 18.4 percent. The rest of the risk components-market risk, operation risk and strategic risk share a contribution of 4.4 percent, with strategic risk alone scoring 3.2 percent. The findings also revealed that there is a marginal difference between high return on asset caused by credit risk and poor return on asset as a result of credit risk. This implies that credit risk roughly has a dicey probability of success and failure on the banking sector performance. Compliance risk has higher probability of performance failure than success while the probability that liquidity risk leads to high return on asset is found to be higher than the probability that it leads to poor return on asset. Therefore, we recommend that the regulatory authorities should make banks create functional risk management departments not only in their head offices but also in their branch offices.

keywords:

Return on asset; Discriminant analysis; Credit risk; Liquidity risk; Compliance risk; Strategic risk

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