Risk Management

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Volume–VI, Number–01, January-June, 2011

Risk Management Practices: A Critical Diagnosis of Some Selected Commercial Banks in Bangladesh MD. ZAHANGIR ALAM* MD. MASUKUJJAMAN** ABSTRACT The paper is about risk management practices of commercial banks in Bangladesh based on five commercial banks operating in Bangladesh. The number of respondents was 25, five from each bank. While collecting the requisite data, five points Likert Scale has been used. The objective of the study was to critically examine risk management practices of Bangladeshi banks i.e., types of risk facing a bank, procedure and techniques used to minimize the risk etc. The study also examines how far the banks follow the guidelines of Bangladesh Bank regarding risk management. The study reveals that credit risk, market risk and operational risk are the major risks to the bankers which are managed through three layers of management system. The Board of Directors performs the responsibility of the main risk oversight, the Executive Committee monitors risk and the Audit Committee oversees all the activities of banking operations. In the context of opinions regarding use of risk management techniques, it is found that internal rating system and risk adjusted rate of return on capital are relatively more important techniques used by banks.

Key Words: Risk, Risk Management, Risk Management Techniques, Banking. 1. INTRODUCTION

In the past two decades, the banking industry has evolved from a financial intermediation between depositors and borrowers, to a “one-stop” centre for a range of financial services like insurance, investments and mutual funds. The advancement of information and communicative technology (ICT) is given credit for the evolution of banking services, in particular, online banking. The development in ICT has not only provided vast banking opportunities previously beyond reach, but also heightens the competition and risks faced by banks in the financial system. (Voon-Choong, et al., 2010). Assistant Professor of Finance, Department of Business Administration, International Islamic University Chittagong, Dhaka Campus. ** Lecturer in Finance, Department of Business Administration, Northern University Bangladesh, Dhaka. *

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Journal of Business and Technology (Dhaka)

Risk is the deviation of the expected outcome. In one way, risk can be classified as business risk and financial risk. Business risk arises from the nature of a firm’s business which relates to factors affecting the product market. Financial risk arises from possible losses in financial markets due to movements in financial variables (Jorion and Sarkis, 1996). It is usually associated with leverage with the risk that obligations and liabilities cannot be met with current assets (Gleason, 2000). Another way of decomposing risk is systematic risk and unsystematic risk. Systematic risk is associated with the overall market or the economy and it can be mitigated in a large diversified portfolio, whereas unsystematic risk is linked to a specific asset or firm and cannot be diversified though its parts can be reduced through mitigation and transferring techniques (Santomero, 1997). However, some risks cannot be eliminated or transferred and must be absorbed by the banks. The first is due to the complexity of the risk and difficulty in separating it from asset. The second risk is accepted by the financial institutions as these are central to their business. These risks are accepted because the banks are specialized in dealing with them and get rewarded accordingly. The objective of financial institutions is to maximize profit and shareholder value-added by providing different financial services mainly by managing risks. (Khan and Ahmad, 2001) Bangladesh Bank, the prime supervisory authority of the financial sector implemented the new capital standard – Basel II from January 2009 in parallel with Basel I. From January 01, 2010 Basel II has been solely implemented in the banking...
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