Debark University

College of Business and Economics

Department of Management

The Assessment of Risk Management practice in Commercial bank

of Ethiopia (A case of Debark Main Branch)

A senior seminar paper Submitted in partial Fulfillment of the Requirement

of Bachelor Art Degree in Management

January, 2021
Debark Ethiopia

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Advisor Signature
_____________________________
RosinaSeid

Date_________________________

Debark University
College of Business and Economics
Department Of Management

38
 ACKNOWLEDGEMENT

First of all I would like to thanks gratefully God and saint Miriam for giving us the strength to
bring my long time dream into reality.

Second I would like to extend most profound gratitude and sincere appreciation to Rosina seid
my adviser and guidance were valuable to the completion of this paper.

Third I would like to thanks to my family in assisting financial aspects to do this paper. Finally I
Would like to give special gratefulness to commercial bank of Ethiopia Debark branch
employees who have done so much on the process of data collection and who provide us the
necessary information by sacrificing their time.

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 ABSTRACT

The study is conducted in Debark commercial bank of Ethiopia main branch consists 33
employees.The main objective of the study was to assess risk management practice especially on
financial risks. To study the research the researcher was used census type of sample design
technique. This census was collected from 33 employees by dividing those employees as
including and excluding criteria the major respondents of the questionnaire was employees who
were under including criteria. The data was analyzed and interpreted by using descriptive type
of research design. The data was collected from only primary data through open ended and close
ended questionnaires. The main findings of the study are the bank faced operational and credit
risks, the bank manage financial risks through risk control method in the way of loss control and
risk financing method in the way of insurance and others. The researcher recommends the bank
should recruit skilled employees to escape from operational risks and perform feasibility
analysis on the creditors internal and external environment before providing debt to be free from
credit risks etc.

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 TABLE CONTENTS
Contents page no.

Acknowledgement ………………………………………………………………………..............I
Abstract………………………………………………………………………………….………..II
Table of content … III
List of table……………………………………………………………………………………….V
Chapter one
Introduction
1.1 Background of the study………………………………………………………………………1
1.2 Statement of the problem………………………………………………………………..…….2
1.3 Research questions……………………………………………………………………….……3
1.4 Objective of the study…………………………………………………………………………3
1.4.1 General objective………………………………………………………………….……3
1.4.2 Specific objective………………………………………………………………..…….4
1.5 Significance of the study………………………………………………………………………4
1.6 Scope of the study…………………………………………………………………………..…4
1.7 Limitation of the study………………………………………………………………………...4
Chapter two
2. Review literature
2.1 Meaning of risk…………………………………………………………………….………….5
2.2 Classification of risks……………………………………………………………….…………5
2.2.1 Financial and non financial risks………………………………………………...……5
2.2.1.1 Types of financial risk…………………………………………………………...5
2.3 .Risk management…………………………………………………………………………..…9
2.3.1 Objective of risk management……………………………………………………….…9
2.3.2 Steps in risk management process……………….......................................................9
2.3.3 Methods of handling risk……………………………….............................................10
2.4 Importance of risk management…………………………………………………………..….12
2.4.1 Importance of risk management in banking business…………………………….....12

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Chapter three
Chapter five
5. Summary of major finding, Conclusion and Recommendation
5.1 Summary of major finding.......................................................................................................36
5.2 Conclusion...........................................................................................................................37
5.3 Recommendation.................................................................................................................39
REFERENCE 40
APPENDIX -A AND B

List of Tables
Table NamePage No
Table 4.1 demographic variable.................................................................................................16
Table 4.2 risk identification method..........................................................................................18
Table 4.3 risk controlling tools...................................................................................................20
Table 4.4 responsible body for handling risk in the organization................................................21
Table 4.5 risk management system.............................................................................................22
Table 4.6 credit risk management..............................................................................................23
Table 4.7 credit risk management system...................................................................................24
Table 4.8 credit risk management system......................................................................................25
Table 4.9 liquidity risk management system...............................................................................27
Table 4.110 interest rate risk management system.....................................................................28
Table 4.11 interest rate risk management system......................................................................29
Table 4.12 interest rate risk management system.......................................................................30
Table 4.13 interest rate risk management system.........................................................................31
Table 4.14 foreign exchange market risk management system....................................................32
Table 4.15 objective of risk management....................................................................................33
Table 4.16 risk handling methods...............................................................................................34

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38
 CHAPTER ONE
INTRODUCTION
1.1 Background of the study
The study of risk management began after world war second. Risk
Management has long been associated with the use of market insurance to protect individuals
and companies from various losses associated with accidental (Harrington & Niehaus, 2003)

Several sources (Crockford, 1981 ;( Harrington&Niehaus, 2003) William and Heins 1995) date
on the origin modern risk management to 1955-1964.snider (1956) observed that there were no
books on risk management at the time and no universities offered courses in the subject. The first
two academic books were published by mehr & hedges (1963) &William&Hems (1964). This
content covered pure risk management, which excluded technological risk management models.
An operational risk has to be managed by financial institutions.

Risk management is a general management function that seeks it identifies, assess and address
the cause and effect of uncertainty and in order to attain the goals and objectives of the
organization in most direct, efficient and effective path.

It is a systematic way protecting business resources and income against losses, (Trieschman,
2005). Risk affects organization not to achieve their goals, influences the country's economic
development. Such thing again also affects the people of the country at large. Hence the enemy
of the organization should properly manage so as to prevent its strategic impact in every aspect
of the organization, (Pandey, 2004).

The purpose of risk management is to identify partial problems before they occur so that risk
handling activities may be planned and invoked as needed across the life of the product or
project to mitigate adverse impacts on achieving objectives. Risk management is a continuous
work.

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Risk management is a specific approach to the problem faced by the business that deal with the
techniques of forecasting future so as to plan, organize, direct and control efforts to minimize the
adverse effects of those potential losses.
Risk is broadly refers to situations where outcomes are uncertain. Risk often refers to specifically
to variability in outcomes around the expected outcome around the expected value. Risk is
costly.

Many businesses achieve internal risk reduction through diversification and through investments
information to improve forecasts of expected cash flows, Harrington& Niehaus, (2003). Risk
occurs in many financial areas, the bank risk manager had made prior arrangements with disaster
recovery facility in remote location that allowed the bank to use the emergency facilities,
computers, and phones and fax machines after a disaster.

The problem concerned with financial risk management on commercial banks that still now not
solved by many researchers, especially, how to improve financial risk management in
commercial bank of Ethiopia problems. So to understand the unaddressed problems and find
solution, the study would conducted on financial risk management practice in commercial bank
of Ethiopia debre markos branch.
1.2 Statement of the problem
Commercial bank of Ethiopia is a strong public bank that plays an important role in the country
economy development as well as social life change. It provides various services; for instance,
credit facilities for building and construction,manufacturing,deposit mobilization,i.e. demand
deposit, saving deposit, fixed deposit and in the international case purchase and sale of foreign
currency,accept international payment card are some functions that was done by commercial
bank of Ethiopia. All the above activities are applied in commercial bank of Ethiopia debre
markos branch.However, debre markos branch bank faced some problems such as credit risk to
earning and capital that the debtor fail to return the borrowed money as well as the interest from
that borrowed principal amount. It is usually associated with loan and advances, but it can also
arise in connection with derivatives, foreign exchanges and other extensions of bank credit. In
addition to the above there were also other type of risk called operational risk which includes

38
liquidity risk and interest risks. These risks affect debre markos branch bank to achieve its
objectives on time and budget amount of money.

There were previous findings in this problem, for instance, in AddisAbabaUniversity by Tsion
(2015) In commercial bank of Ethiopia in the research findings concluded that bank managers
perceive risk management as very important and critical to their bank's overall performance and
also the researcher concludes that the main types of risk exposures in financial risk are credit
risk, operational risk, liquidity risk ,market risks , interest risks and foreign exchange risks. In
addition to this there was a reasonable success with the current risk management practices.
Finally Ethiopia banks are utilizing some of the approaches traditionally used to manage
financial risks to day. Overall the finding of the previous researcher suggests that banks
operating in Ethiopia are risk focused. Even though the previous study can got all of the above
findings the researcher was not seen what type of methods are available to improve financial risk
management. So this study would try to assess this type of question in the study of commercial
bank of Ethiopia debre markos branch. To this end the study tried to answer the following
research questions.

● What type of the financial risks faced by the bank?

● What types of preventive techniques and procedures of risk management the bank used?
● What mechanisms followed the bank to control risks?
● What look like the effectiveness of the risk management practices and procedures of the
bank in relation to financial risk?
1.4 Objective of the study
1.4.1 General objective
The general objective of the study is to assess risk management practice in commercial bank of
Ethiopia debark branch.

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1.4.2 Specific objectives
In addition to the general objective the study tries to address the following specific research
objectives.

● To assess the type of financial risks faced by the bank.

● To know methods used by the bank to prevent possible risks.
● To understand the ways the bank applied to control risks.
● To assess and evaluate the risk management practice of the bank.
1.5 Significance of the study
The result of this study would be significant in various aspects, for instance , it would clearly
reflect the most difficulties observed in risk management practice in commercial bank of
Ethiopia in debark branch and answer the problems regarding with risk management in the
organization, and the research would used as a reference the researcher successors who study in
risk management. The research would also used as a guideline for managers of the bank to apply
good management system in debark branch bank of Ethiopia through providing necessary
information about risk of the bank in order to minimize it.

CHAPTER TWO
REVIEW LITERATURE
2.1 Meaning of risk
There is no single definition of risk, economists, behavioral scientists, risk theorists, statisticians
and actuaries each have their own concept of risk. However, risk traditionally has been defined
in terms of uncertainty, based on this concept risk is defined here as uncertainty concerning the
occurrence of loss. Although risk is defined uncertainty, employees in the insurance industry
often use the term risk to identify the property or life being insured. Those in the insurance
industry it is common to hear statements such as that driver is a poor risk or that building is
unacceptable risk. (Reida, 2008)
Although the insurance theorists have not agreed on a universal definition there are common
elements in all the definitions, indeterminacy and loss. (Teklegiorgis,2004)

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2.2 Classification of risk
Risk can be classified into many ways. There are certain distinctions that are particularly
important for our purpose. The major categories of risk are;
2.2.1 Financial and non financial risk
In broadest context, the term risk includes all situations in which there is an exposure to
adversity. In some cases this adversity involves financial loss, while in others it does not. There
is some elements of risk in every aspect of human life, and many of this risks have no financial
consequences .so in this context we are concerned with those risks that involve a financial loss.
2.2.1.1 Types of financial risks
Financial risk comprises two types of risks. pure risk including liquidity, credit and solvency
risks can result in loss for banks, if they are not properly managed. Speculative risks based on
financial risks are subject to complex independences that may significant increase overall risk
profiles. For example bank engaged additionally to liquidity and interest rate risks if the bank
carries open position,(Teklegiorgis,2004)
I.Credit risk
The risk that a firm’s customers and the parties to which it has lent money will fail to make
promised payments is known as credit risk. most firms face some credit risk for account
receivables. The exposure to credit risk is particularly large for financial institutions, such as
commercial banks that that routinely make loans that are subject to risk of default by the
borrower. when firms borrow money, theyin turn expose lenders to credit risk(i.e. ,the risk that
the firm will default on its promised payments). As consequence borrowing exposes the firms to
the risk that the firm will be unable to pay its debts and thus be forced into bankruptcy, and the
firm generally will have to pay more to borrow money because of credit risk ,(Harrington &
Niehaus,2003)

A. Types of credit risk

Direct lending risk that actual customer's obligation will not repaid on time, which exists for the
entire life of the transaction. A Contingent lending risk the risk that potential; customer’s
obligation will become actual obligation and will not be paid on time. It occurs in product
ranging, some letter of credit and grants, which exists still for the entire life of transaction.
Documentation risk is the risk that documentary evidence which depends on the enforce of our

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rights under conduct, may not complete, correct or enforceable for presentation of quality 0f loan
are existence of a well developed policies and procedures, strong and most critical element all
well trained staff that is qualified to implement the system.
II.Liquidity risk
Liquidityrisk is a condition at an individual or business where in high percentage of the assets
can be quickly converted into cash without involving any considerable loss by accepting
sacrifices prices. It implies a high degree of correctness and solvency in the equity sense, the
ability of current assets will be able to meet current liability as they nature. Liquidity risk can be
also defined as uncertain future outcomes that either improve or worsen the present liquidity
position of the company.
III.Foreign exchange risk
The term foreign exchange refers to the simultaneous purchase of one currency and selling of
currencies is traded impaired. Foreign exchange risk results from change in exchange rate
between banks domestic currency and other currencies.
A. Factors affecting foreign exchange market
There are so many factors that affect foreign exchange market that influencing the value of
currencies. Some of them are;
● Change in interest currency affects the value of currencies in the interest rate.
● The rate of inflection in the economy of the country, the lower will be the demand for the
currency to the result in decrease of value.
● The country is economical and political stability has also impact with the demand and
supply of currency, the local currency will be strong.
● National banks interventional either in interest rate or exchange rate have an impact on
value of currencies depending on the position taken by such bank.
IV. Interest rate risk
Interest rate risk refers to the exposure of economic unit to movement in the market rate of
interest. It is an important part of the banking balance sheet. The management system which
concerned with marking the corporate trade of, striking the correct balance between profitability,
liquidity and capital adequacy of solvency. (James& Treisman, 1998)

V. Operational risk

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Operational risk are related to bank's overall business strategy, organization, functioning of
internal systems including computer related and other technologies compliance with bank
policies and fraud, operational error and system related or informational problems.(pandey,2004)
VI. Static and dynamic risk
Static risks are risks that involve those losses that would occur even if there were no changes in
the economy. Those risks include losses caused by the regulation s of the force of nature or
human errors.
Dynamic risk is those risks resulting from change in the economy, change in the price level,
consumer tastes, income and outputs and technology may cause financial losses to member of
the economy. This risk related with change in human wants. Although these dynamic risks may
affect a large number of individuals, they are generally considered less predictable than static
risk, since they do not occur with any precise degree of regularity. ( Reida, 2004)
Dynamic risks normally benefit society over the long run, since they are the result of adjustments
to misallocation of resources.
Unlike dynamic risks static risks are not a source of gain to society. Static losses involve either
the destruction of the asset or change in its possession as a result of dishonesty or human failure.
(Emmett &,Therese ,2007)

VII. Fundamental and particular risk

The distinction particular between fundamental and particular risk is based on the difference in
the origin and consequences of the losses.
Fundamental risks involve losses that are impersonal in origin and consequence. They are group
risks caused for the most part of economic, social and political phenomena. Although they may
also result from physical occurrences, they affect large segments or even all of the population.
Particular risks involve losses that arise out of individual events and are felt by individuals
rather than by the entire group. They may be static or dynamic. Unemployment, war inflation,
earthquakes and floods are fundamental risk. The burning of the house and the robbery of the
bank are particular risks. (Emmett &Therese, 2007)
VIII. Objective and subjective risk
Objective risks are defined as the relative variation of actual from expected losses. It is mainly
applicable to group of objective exposed to losses. It can be statistically measure by some

38
measure of dispersion as the standardization efficient of variation. It is extremely useful concept
for an insurer or corporate type of risk manager.
Subjective risk is defined as uncertainty based on a person's mental condition or state of mind.
Subjective risk has been measured by means of different psychological tests but not widely
accepted or uniform tests of proven reliability have been developed.(Trieschman,1998)
Objective risk declines as the number of exposures increases more specifically, objective risk
varies inversely with the square root of the number of cases under observation.
Subjective risk is a risk its impact is varied depend on individuals. High subjective risk often
results in conservative and prudent behavior.(Reida, 2008)
VIIII. Pure and speculative risk
pure risk is defined as it is used to designate those situations that involve only the chance of loss
or no loss. One of the examples of pure risk is the possibility of loss surrounding the ownership
of property. Speculative risk describes a situation in which there is possibility of loss, but also
possibility of gain. Gambling is the good example of speculative risk. Pure risk normally
insurable risks whereas speculative risks are uninsurable. Speculative risks are voluntarily
accepted because of its two dimensional nature which includes the possibility of gain. (Emmett
& Therese, 2007)
Pure risk is a situation in which there is only possibility of loss or no loss. The only possible
outcomes are adverse and neutral. Speculative risks are defined as a situation in which there is
only profit or loss is possible. It exists when there is a chance of gain as well as a chance of loss.
(Teklegiorgis, 2004)
2.3. Risk management
Risk management is a systematic process at identification and evaluation of pure loss exposure
faced by an organization or individual and the selection and implementation of the most
appropriate techniques for testing such exposure. It is a systematic approach to dealing with pure
risk by anticipating possible accidental losses as the financial impact of the loss that does occur.
As a general rule, the risk manager is concerned only with management of pure losses, not
speculative risk. All pure risk conceded, including these that are uninsurable.(Teklegiorgis,2004)
2.3.1. Objective of risk management
There are many objectives of risk management that are classified as pre loss objective and post
loss objective.

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 ● Pre loss objective; a firm or organization has several risk management objective prior to
the occurrence of loss. Such as the reduction of anxiety and analysis of safety program
expense and meeting external obligation.
● Post loss objective; are important risk management that can be meet after the occurrence
of loss. Such as survival of the firm, continuity of prediction, stability of earning per
share and continued growth by developing new products and market or by acquisition
and mergers.( Reida,2008)
2.3.2. Steps in risk management process
There are 4 steps in risk management process.
1. Risk identification
It is the first step that used to identify major and minor loss exposures.
This step involves a painstaking analysis of all potential losses. a risk manager have several
sources of information that he or she can use to identify the preceding loss exposures. They
include the following; risk analyses questionnaire, physicalinspection, flow charts, financial
statement, historical lossdata.(.Reida,2008)

2. Risk evaluation
losses in their course the risk manager obtain information that is helpful in determining the
relative importance of identified risks and selecting particular techniques for managing those
risks. As part of the overall risk evaluation, it may be possible to measure the degree of risk
After risks are identified, they should evaluate regarding their expected frequency of occurrence,
the probable severity of loss, the maximum probable and possible in meaningful way in some
situation.(James & Treschman,1998)
3. Selecting appropriate risk management tool
After identifying and evaluating various exposures to risk, alternative consideration can be given
to alternative method for managing each exposure. The tools are included primary avoiding the
risks, reducing the chance that the loss will occur or reducing its magnitudes, transferring the risk
to some other party, retaining or bearing the risk internally. In selecting the proper, that the risk
manager must establish the cost and other consequence of using each or combination of tools it
may also consider the current financial position of the firm.(Teklegiorgis,2004)

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4. Implementing and review decision
Based on the decision about the optimal method of handling identified risk, the business or
individual must implement the best techniques of selected, however, risk management should be
an ongoing process in which preview decision and reviewed regularly, because sometimes new
risk exposure may require in continual security of past analyses and delusion.(Teklegiorgis,2004)

2.3.3. Methods of handling risk

The selection or risk management techniques is dynamic problems, best method for handling a
particular exposure to day may not be the best method flays next year, because so many factors
change regularity. The cost and availability of different risk management tools cannot be
assumed to remain constant.(Reida,2008)
There are 5 major methods of handling risk these are:

A. Avoidance
Avoidance is one method of handling risk, for example you can avoid the risk of being mugged
in high crime rate area by staying out of the area; you can avoid the risk of divorce by not
marrying and business firm can avoid the risk of being sued for defective product by not
producing the product. Not all risks should be avoided, however, example you can avoid the risk
of death or disability in a plane crash by refusing to play.( Reida,2008)
B.Loss control
Loss control is another important method for handling risk. Loss control consists of certain
activities that reduce both the frequency and severity of losses. Thus loss control has two major
objectives loss prevention and loss reduction.
C. Loss prevention
It aims to reducing the probability of loss so that the frequency of losses is reduced. Loss
prevention is also important for business firms. Example, strict security measures at airports and
broad commercial flights can reduce acts of terrorism.

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D. Loss reduction
Strict loss prevention efforts can reduce the frequency of loss, yet some losses will inevitably
occur. Thus the second objective of loss control is to reduce the severity of a loss after it occurs.
(Reida,2008)
E. Retention
Retention means that an individual or a business firm retains all or part of a given risk. It can be
active retention or passive retention.
1. Active retention
Active retention means that an individual consciously aware of the risk and deliberately plans to
retain all or part of it.Active retention is used for two major reasons first to save money and
second the risk may be deliberately retained because commercial insurance is either unavailable
or unaffordable.
2. Passive retention
Certain risks may be unknowingly retained because of ignorance, indifference or laziness.
Passive retention is very dangerous if the risk retained has the potential for destroying you
financially. In summary risk retention is an important technique for handling risk in modern risk
management program.( Reida,2008)
F. Non - insurance transfer
Non insurance transfers are another technique of handling risk. The risk is transferred to a party
other than an insurance company. A Risk can be transferred by several methods including;
transfer of risk by contracts, hedging price risks, incorporation of a business firm.( Rejda,2008)
G.Insurance
For most people insurance is the most practical method for handling a major risk. Although
private insurance has several characteristics, three major characteristics should be emphasized.
First Risk transfer is used because of a pure risk is transferred to the insurer. Second the pooling
technique is used to spread the losses of the few over the entire group so that average loss is
substituted for actual loss. Finally, the risk may be reduced by application of the law of large
numbers by which an insurer can predict future loss experience with greater accuracy.
(Reida,2008)
2.4. Importance of risk management

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Willy-nilly risk and uncertainty are real. Everyone encounters uncertainty about one's health. As
future is so abounding uncertainty that to live through it despite the thrills it offers to man, this
makes/helps/ man is completed to make an all out effort to counterbalance this future
uncertainty. In view risk management importance is attempted that made to present the
techniques of managing financial risk.(K.Ramakrishna,& P murali kris,2000)
2.4.1. Importance of risk management in the banking business
Risk exists whenever the future is unknown because the adverse effect of risk played making. As
a result accidental losses each day threaten for the survival of some business. Because their
earning to dip below acceptable levels, intercept think operation or slow their growth. All
business faces the threat of losses that may never occur. Worry about their possibly do more than
make life less pleasant, it may stop business to handle its exposure to accidental losses in the
most economic and effective way. Organizations of all sorts have recognized the increasing
importance of sound risk management. (James& Treisman, 1998)
The purpose of risk management is to minimize the heart at a minimum cost and its
contribution to the business can also be categorized as follows.
Risk management may take the difference between survival and failure that means risk
management can contribute directly to business profit for profit making organizations and
increase efficiency for nonprofit organization, because profit can be improved by reducing
exposing as well as increasing income.
If the business has successfully managed its pure risk the peace of mind and confidence
permits its manager to investigate and assume attractive speculative risks that they might
otherwise seeks avoid.
By altering general managers the pure risks aspect of speculative venture management
improves the quality of decision regarding such ventures.
Risk management can reduce the function in annual profit and cash flows investors regard for
favorable stable earning record than unstable one.(James &Trieschman,1998)

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 CHAPTER THREE
.

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6. When borrowers face certain problems and unable to pay the loan, what mechanism do you apply in order to the loan to be collected?

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 I t e m Number of respondent P e r c e n t a g e ( % )

Extension of loans 1 9

Rearrangement of loans repayment 1 9

Injection of addition loan - -

All the above three used depend on the condition 6 5 5

Rearrangement of loan repayment and extension of loans 2 1 8

O t h e r 1 9

T o t a l 1 1 1 0 0

(Source:
I t e m Number of respondents percentage(%)
survey,
A g r i c u l t u r e 2 1 8 2016)
From the
Domestic trade sector 3 2 7
above
Import and export manufacturing 1 9

Building construction - -

Agriculture, domestic trade service and import and export manufacturing 4 3 6

Import and export manufacturing sector and agriculture sector 1 9

T o t a l 1 1 1 0 0

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 As there need 9 8 2

O t h e r 2 1 8

T o t a l 1 1 1 0 0

(Source: survey, 2016)

N o 7 6 4

3 2 7

I am not quite aware of it

T o t a l 1 1 1 0 0

(Source: survey, 2016)

As it is indicated from the above table about 1(9%) of the respondents said that there is
speculation of interest rate technique practiced in commercial bank of Ethiopia debre markos
branch before interest rate fixed by government. 7(64%) of the respondents also said that there is
no speculation technique practiced in commercial bank of Ethiopia debre markos branch before
the interest rate fixed by government. 3(27%) of the respondent said that there is no clear
understanding about the speculation interest rate practice within the bank before the government
fixed.
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4.9 foreign exchange market risk
The term foreign exchange refers to the simultaneous purchase of one currency and selling of
currencies are traded impairs. Fore exchange risk results from change in exchange rate between
banks domestic currency and other currencies.

Table 4.14 foreign exchange market risk

13. How foreign exchange markets affect the organization ?

I t e m N u m b e r o f r e s p o n d e n t s percentage(%)

H i g h l y 7 6 3

In some extent 4 3 6

L o w l y - -

Not affect at all - -

T o t a l 1 1 1 0 0

(Source: survey, 2016)

The above table shows that 7(64%) of the respondents said that foreign exchange market affect
the bank highly. 4(36%) of the respondents said that foreign exchange market affect the bank in
some extent. This indicates that most of the respondents said foreign exchange market affects the
bank highly
4.10. Objective of risk management
There are many objectives of risk management that are classified as pre loss objective and post
loss objective. Pre Loss objective means affirm have several risk management objective prior to
the occurrence of a loss whereas post loss objective is affirm have several risk management
objectives that can be after the occurrence of loss.

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Table 4.15 objective of risk management

14. What type of objective of risk management does the organization used?

I t e m N u m b e r o f r e s p o n d e n t s percentage(%)

Pre loss objective 6 5 5

Post loss objective - -

Most of the time pre loss and sometimes post loss 4 3 6

Most of the time post loss and sometimes pre loss 1 9

T o t a l 1 1 1 0 0

(Source: survey, 2016)

The above table indicates that 6(55%) of the respondents said that the bank used pre loss type of
objective of risk management. The other 4(36%) of the respondents said that the bank used most
of the time pre loss and sometimes post loss objectives of risk management objective. 1(9%) of
the respondents said that the organization used most of the time post loss and sometimes pre loss
objectives of risk management objectives. This indicates that the organization used pre loss
objective of risk management objective as most of the respondents agreed.
4.11 Risk handling method
The selection of risk management techniques is dynamic problems. The best method for handling
a particular exposure today may not be the best method flays next year, because so many
relevant factors change regularly. The cost and availability of different risk management tools
cannot be assumed constant.

38
Table 4.16 Risk handling methods

15. What type of risk handling method used in the organization ?

I t e m N u m b e r o f r e s p o n d e n t s Percentage (%)

A v o i d a n c e 1 9

Loss control - -

R e t e n t i o n - -

Loss control and insurance 5 4 5

Avoidance and insurance 2 1 8

Non insurance transfer - -

I n s u r a n c e 3 2 7

T o t a l 1 1 1 0 0

(Source: survey, 2016)

The above table shows that 1(9.09%) of the respondent said that the bank handle risk through
using avoidance method. The other 3(27%) of the respondent said that the bank used insurance to
handle risk. 5(45%) of the respondents said that the bank used loss control and insurance to
handle risk. The other 2(18%) of the respondent said that the bank used avoidance and insurance
in order to handle risk in the organization. This indicates that the bank used loss control and
insurance to handle risk as most of the respondent agreed.

4.2 Analyses of interview questions

Inaddition todata collect by distributing questionnaires among employees an interview is
conducted with manager of the bank and the analysis is made as follows.Regarding to the type

38
of financial risks that the bank faces is that operational and credit risks. The other information
come from manager is the follow up mechanism of customers after granting loans used by the
organization is that continuous follow up mechanism. The organization motivate or train
employees in order to manage risks through providing continuous risk awareness to all
employees on how to control risk proactively.

CHAPTER 5

38
 5. SUMMARY OF MAJOR FINDINGS, CONCLUSION AND
RECOMMENDATION
5.1 Summary of major finding

★ Starting from demographic nature most of the employees of the organization were male
according to 11(100%) of the respondent said.
★ The age of employees mostly were between 25-30 as 5(45%) of the respondent said.
★ The level of education of most of the employees of the organization were first degree as
8(73%) of the respondent said.
★ Mostly the work experience of employees also were below 5 year as 7(64%) of the
respondent said.
★ Most number of respondents 3(27%) said that the organization was used physical
inspection technique to identify risk.
★ The risk control used by the organization was avoidance as 6 numbers of respondent or
55% of respondent said.
★ The most responsible body in handling risk in the bank was the manager as 9(82%) of
respondents said.
★ The risk management system of the organization was perfectly applied as 7(64%) of the
respondent indicated.
★ The bank assess borrowers past financial creditworthiness and perform detailed financial
analysis before extending the loan in some extent as 9(82%) indicated.
★ To collect the loan when borrowers faces a certain problem and unable to pay the loan the
organization used extension of loan, rearrangement of loan repayment and injection of
addition loan mechanisms depending on the conditions as most of the respondents or
6(55%) of the respondents indicated.
★ The bank usually emphasized to give loans and advance granted to agriculture, domestic
trade service and import and export manufacturing sectors as most of the respondents
said or 4(36%) of the respondent indicated.
★ Most 7(64%) of the respondent indicated that equity distribution and deposit mobilizing
were the source of fund raising that the commercial bank of Ethiopia relying.

38
 ★ Most respondents that is 6(55%) of the respondents said the organization have a separate
body responsible for interest rate risk management.
★ The bank have policy and procedure in managing interest rate risk as most of the
respondents that is 4(36%) of the respondents agreed.
★ The bank revised its interest rate structure in order to minimize the risk structure as there
need as most of the respondent that is 9(82%) of the respondent indicated.
★ Most 7(64%) of the respondents agreed that the bank speculation of interest rate practiced
before the government fixes it.
★ Foreign exchange market affect the organization highly as 7(64%) of the respondent
indicated.
★ Organization used pre loss objective of risk management objective as 6(55%) of the
respondent said.
★ Bank handle risk by using a method called loss control and insurance as most
respondents 5 number of the respondents or 45% of the respondents agreed.

5.2 Conclusion

The researcher is intended to find out the risk management practice of commercial bank of
Ethiopia in debre markos branch. The following are drawn on findings of the study.

❖ The conclusion that can be reached is that the bank has faced financial risks were
operational and sometimes credit risk. Operational risk come from when doing their
activity the organization employees theft money from bank and credit risk of the
organization comes from un ability of debtors to return the expected payment through
several reasons: Unwise use of finance , unexpected natural condition in the investment
area of debtors and the like.
❖ The bank used both risk control technique and risk financing techniques (methods) to
improve risk management, but not all risk control and financing were used in the
organization. From risk control methods the bank used loss control and avoidance only
and from risk financing the bank used insurance. From risk control method avoidance
was used to proactively escape the bank from any risk that means source of risk activity

38
 was totally denied to come to the bank or abandon the excited risk source activity. Loss
control also applied through performing a certain activity that reduces the frequency and
severity of losses. And from risk financing tools or methods the bank used insurance
through distributing risk to different risk exposure groups; this is the most practical
method for handling a major risk. The bank used this method because of the risk may be
reduced by application of law of large numbers by which an insurer can predict future
loss experience with greater accuracy.
❖ The organizations have the following risk management practice procedures. First the
organization identifies the risk through physical inspection method of risk identification.
Secondly evaluate the severity and frequency of the risk in order to assign appropriate
method of handling risk and then thirdly select appropriate technique of treating loss
exposure methods called avoidance, loss control and in order to reduce severity and
frequency of loss and through insurance in order to transfer the already existed risk after
the risk occurred. And finally the bank assigned risk handling responsible body to
implement the risk management activity for instance, the most responsible body in risk
management for the bank was the manager and adopted different policies and procedures
to implement risk management activity. Such as for interest rate risk management the
organization used special policies and procedure. Thus the final procedure indicated that
the bank was assigned responsible body and policies and procedures in order to
implement and administer risk management.
❖ The researcher also concluded that the organization control risk through motivation or
training in the way of providing continuous risk awareness to all employees on how to
control risk proactively or before any financial risk occurred

5.3 Recommendation

38
According to the information gathered analysis has been made based on the above fact, the
researcher recommends as possible solutions, which might alleviate the short earning of income
and reduce various types of financial risks.
 The management of commercial bank of Ethiopia should recruit honest employees and
appraise their performance continuously at least three times a year through revising
policies and procedures of risk management and before going to give credit to the debtors
the organization should analyze feasibility of environment that the debtor invest the bank
money and the bank should evaluate the security offered for funds versus the risks
involved and appraise the quality of management rather than tangible assets on debtors in
guaranteeing the security of the loan.
 The practical evidence indicated that the bank used avoidance, loss control and insurance
methods to improve financial risks, but when the bank used avoidance the manager
should analyze the loss and profit that certain loss exposure thing gives. If loss is greater
than profit from certain loss exposure thing, the bank should avoid certain loss exposure
thing. But if profit is greater than losses that come from loss exposure thing the bank
should maintain or not avoid that loss exposure thing. And when the risk manager used
insurance to treat certain loss exposure five key areas should be critically emphasized
these are selection of insurance coverage, selection of appropriate insurer, negotiation of
terms, dissemination of information concerning insurance coverage periodic review of
the insurance program.
 The practical evidence also indicates that the organization used physical inspection
method of identifying risk, this method is a specialized technique for risk identification
there are specialized risk surveyors who can be appointed to carry out the inspection and
then report back to the management, adding their own assessment and suggestions. The
report prepared by them are very useful for the risk manager but the risk manager should
keep in mind that the report prepared by risk servers for a particular purpose and they are
not embracing all the risk events which could occur on the floor of the organization.
Generally the researcher can recommend that the bank manager should revise policies
and procedures of risk management practice depending on the existed condition for the
future.

References

38
 ➢ Emmett J. Vaughan & Theresmen. Vaughan, (1992) fundamentals of risk management,
9th edition.
➢ George E. Reida, (2008) principles of risk management and insurance.
➢ Harrington and Nihaus, (2003) risk management and insurance, 2th edition.
➢ James S. & Trieschman, (1998, 2005) management and insurance 12th
edition, Terry College of business university of Georgia.
➢ K, P and Kris, (2000) risk management and insurance.
➢ Pandy, (2004) financial management, mc grew hill India.
➢ Teklegiorgis Assefa, (2004), risk management and insurance
➢ Richard et al.,(1956, 1963, 1964, 1982, 1998)

Website used
➢ Http: // www, cirrelt, caldocument travail (CIRRE/T-2013-17, pdf up to managed as one.
➢ ETD, aau. Edu et/bitsstream 123456789/6891)1/ Tsion/fekadeselassie. pdf

Appendix- A
Debark University
38
 College of business and economics
Prepared by: Abera Ayalew from management students
Dear respondent

This questionnaire is designed for purpose of collecting data on risk management practice which
is required for senior essay as an integral part of my study. The data that collect from you is used
for the academic purpose only. Therefore request you to help me in answering these questions
below.

Instructions

● It is possible to give answer for the given equations more than one alternative.
● It is not necessary to write your name in questionnaire paper.
● Put (x) mark on the box which is correspondent to your answer.
● You can use the space provided to write your answer.
Thank you in advance!

Part 1: demographic nature of the respondents.

1. Sex: male female
2. Age: 20-25 25-30 30-35 above 35
3. Level of education: first degree Ms degree above Ms
degree
4. Work experience: below 5 year 5-10 year above 10 year

Part 2: specific questions related to the study objective.

1. Which technique is the most available in risk identification in the organization?
Checklist Financial statement Physical inspection
organizational chart Incident report
if any other………………………………………………………………...............

2. Among the risk control tools which is existed in the organization?

38
Avoidance separation diversification loss presentation
combination if any other…………………………………………………………

3. Who is the most responsible body in handling the risk of the bank?
Manager Employee Government if
any other…………………………………………………….
4. Do you think that risk management system is effectively applied in our organization?

Perfectly applied Less applied need some adjustment

Not at all I am not quite aware of it if any
other………………………………………………………….
5. Does the bank asses borrowers past financial creditworthiness and perform detailed financial
analysis before extending the loan?
Yes perfectly yes in some extent Not at all I am
not quite aware of it If any other……………………………..
6. When borrowers face a certain problem and unable to pay the loans, what mechanism do you
apply in order to the loan to be collected?
Extension of loans rearrangement of the loans repayment
injection of addition loan If any other………………..
7. from the total loans and advance granted to its customer in which sector does the bank
usually emphasized?
Agriculture sector Domestic trade service Import and
export manufacturing sector Building and construction
If any other………………………………………………………………….
8. Which source of fund raising do commercial bank of Ethiopia relying?
Deposit mobilizing Equity distribution Borrowing
Both equity distribution and deposit mobilizing
If any other……………………………………………………………………………………..
9. Is there a separate body responsible for interest rate risk management?
Yes No I am not quite aware of it
If any other………………………………………………………………………………….

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10. Is there any policy or procedure adapted in managing interest rate risk?
Yes No I am not quite aware of it
If any other………………………………………………………………………………..
11. How does commercial bank revise its interest rate structure in order to minimize the risk
structure?
Annually Semiannually Quarterly As there need
If any other………………………………………………………………………….
12. Does the bank speculation of interest rate will practice in the bank before the government
fixes it?
Yes No I am not quite aware of it
If any other…………………………………………………………………………..
13. Foreign exchange markets affect the organization?
Highly Lowly Not affect at all
If any other…………………………………………………………………………………..
14. What type of objective of risk management does the organization used?

Pre loss objective Post loss objective Most of the time pre loss and
sometimes post loss objectives Most of the time post loss and sometimes
pre loss objectives
If any other…………………………………………………………………………………
15. What is the risk handling method used in the organization?
Avoidance Loss control Retention
Non insurance transfer Insurance
If any other……………………………………………………………………………….

Appendix- B
Interview questions

38
1. What type of financial risks the organization face?
2. How was the follow up mechanism of your customer after granting loans?
3. How the organization motivates or train employees in order to manage risk in your
organization?

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