1.1 Background of the Study
Deposit Money Banks are the backbone of the economy of any country. They are the determinant factors to bring the development of the country; They serve as bridges between savings and investments. Furthermore, deposit money bank are the institutions specifically designed to further the capital formation process through the attraction of deposits and the extension of credit ( see Dhanuskodi, Thangavelu, Venkatachalam & Sudalaimuthn, 2007:2).
Various work have been conducted to recognize the pivotal role of deposit money banks, then referred to as commercial banks, in development of a country. Salvage (1979), Kanu (2005), Adekanye (1986), Ekezie (1997) and Rose & Hudgins (2008); highlight the important roles of deposit money banks to include: acceptance of deposits, granting of credit facilities, financing foreign transactions, offering of trust services, discounting services, financing e-commerce, safe keeping of valuables, managing investments, implementation of monetary policies and foreign reserve management.
Despite these important roles, deposit money banks are exposed to a wide array of risks: financial operations, business and events risks (see figure below). Financial risks reflect possibility of loss associated with liquidity, capital adequacy, credit, profitability and market. While operational risks reflect uncertainty of earnings due to failures in computer systems, management errors, and employee misconduct. Business risks are associated with a bank’s business environment, including macroeconomic policy concerns, legal and regulatory factors, and the overall financial sector infrastructure and lastly, event risks are exogenous risk like political crisis, that could affect bank’s operations.
Figure 1: The Banking Risk Spectrum