This study aims to examine the degree to which local commercial banks in Sabah use Risk Management Practices (RMPs) and techniques in dealing with different types of risks. In the present day, it is undoubtedly that all banks are facing a large number of risks such as market risk, liquidity risk, credit risk, and interest rates as the volatility of environment increases. Risks subsequently threat the bank's survival and success. Thus, it is a crucial part to evaluate the efficiency of risk management practices of a bank, especially those of commercial banks. The findings in this study can be used as a valuable feed back for improvement of RMPs in the commercial banks in Sabah as well as references to everyone who interested in the banking industry. This study will examine the RMPs of local own commercial banks, namely Affin Bank Berhad, Alliance Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Hong Leong Bank Berhad Malayan Banking Berhad (Maybank), Public Bank Berhad and RHB Bank Berhad in Sabah through handing over a set of questionnaires to its staffs in Regional Offices of each banks. The data which acquired from the questionnaires are then analyzed with Regression analysis using Statistical Package for Social Sciences 13.0 For Windows (SPSS 13.0) to derive the result of this study.
Background of The study
Financial system in Malaysia consists of financial market and financial institution. The major function of the financial institution is to provide financial services. Financial institution comprises of Banking system and Non-bank financial intermediaries. Banking system includes Central Bank of Malaysia, commercial bank, finance companies and investment companies. The largest and the most significant providers of funds in the banking system are commercial banks.
Currently, there are 24 commercial banks in Malaysia (excluding Islamic Banks) of which 13 are locally incorporated foreign banks. There are nine major local own commercial banks in Malaysia, and these are Affin Bank Berhad, Alliance Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Hong Leong Bank Berhad Malayan Banking Berhad (Maybank), Public Bank Berhad and RHB Bank Berhad. While the major foreign own commercial banks in Malaysia are ABN AMRO Bank, Bank of Amerika, Bangkok Bank, Bank of China, Citibank and Bank of Tokyo.
1.1.2 Background of the organizations
Affin Bank Berhad is a commercial bank with a network of 90 branches nationwide. It was founded in year 2001 and formerly known as Perwira Habib Bank. It serves both retail and corporate customers and is the smallest anchor in Malaysia. Affin Bank's wholly-owned Islamic banking subsidiary Affin Islamic Bank Berhad (Affin Islamic) offers a complete range of Syariah-compliant financial products and services. Its total assets in 2010 are RM 42,063,921,000 and its total liabilities are RM 38,750,917,000.
Alliance Bank Malaysia Berhad was formerly known as Alliance Banking Group and was founded in early 2001 through a merger of 7 financial institutions. It serves in consumer banking, SME banking, commercial banking, wholesale banking, Islamic banking, investment banking and stock broking businesses as well as unit trust and asset. Its total assets in 2010 are RM 26,937,995,000 and its total liabilities are RM 24,210,521,000.
AmBank Group was founded in 1975 as Arab-Malaysian Development Banking and was brought via Kuala Lumpur Stock Exchange (KLSE) in 1981. It is the fifth largest banking group in Malaysia with more than 200 branches nationwide. It serves in retail banking, commercial banking, investment banking and insurance sectors. Its total assets in 2009 are RM89, 892,881,000 and its total liabilities are RM 81,981,326,000.
CIMB Group operates as a universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management. It is the second largest financial services provider in Malaysia with total assets of RM 269.4 billion.
EON Bank Berhad was first listed on the Main Board of Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange) on 23 December 2002. Just as the other commercial banks, it also provides banking and finance services both in conventional and Islamic features. In year 2009, its total assets are RM 46,605,875,000 and its total liabilities are RM 42, 779,177,000.
Hong Leong Bank Berhad began its operation in 1905 in Sarawak. It has strong market position and well-recognized business franchise as it has been in operation for more than 100 years. As in the year 2010, Hong Leong Bank has total assets of RM 69,992,756,000 and total liabilities of RM65,069,623,000.
Malayan Banking Berhad (Maybank) was founded in year 1960. It is the largest bank and financial group in Malaysia which has banks more than 1,750 branches and offices in 14 countries worldwide. In year 2010, it has total assets of RM 248.4 billion and net profit of RM 3.55 billion.
Public Bank Berhad was founded in 1966. Public Bank Brand is the best brands in Malaysia. It was awarded with the best bank and corporate governance in year 2010 by international finance and banking publications. In year 2010, it has total assets of RM 186,409,862,000 and total liabilities of RM 174,107,111,000.
RHB Bank Berhad was founded in year 1997 after the merger of Kwong Yik Bank and DCB Bank. It is the main subsidiaries of RHB Group which is currently the fourth largest fully integrated financial services group in Malaysia. Its total assets in year 2010 are RM 129,325,000 and its total liabilities are RM 119, 353,000.
1.1.3 Commercial Banks and Risk Management Practices
The main functions of commercial banks are to provide retail banking services such as the acceptances of deposit, to provide loans scheme, and financial guarantees. Moreover, it prepares trade financing facilities such as letters of credit, discounting of trade bills, shipping guarantees, banker's acceptance, trust receipt, treasury services and others. In Malaysia, commercial banks are also entrusted to deal in foreign exchange rates and are the only financial institution that permitted to provide current account facilities.
Given the volatile environment across the world and domestic market, commercial banks are exposed to vast number of risks. Risk is defined as uncertainty that may deviate the actual return from the expected return. Risk could heavily affect the bank's performance and survival. In other words, banking is a business of risks ( Al-Tamimi 2007). Risk can be categorized to systematic risk and unsystematic risk. Systematic risk is non-diversifiable risks that cannot be eliminated such as market risk, interest rate risk, and purchasing power risk. Unsystematic risk is a diversifiable risk that is unique only to a particular company such as business risk and financial risk.
Commercial banks in Malaysia have seriously adopted the risk management practices in their company. For example, Maybank Berhad has appointed a qualified and experienced person to be Group Chief Risk Officer to monitor and assess the present of risks in the company (The Asian Banker). Most annual report provided by the banks emphasizes several informations on risk management practices of the banks. For example, Alliance Bank emphasizes financial risk management objectives and policies in its annual report.
This study examines the degree to which the commercial banks in Sabah use Risk Management Practices (RMPs) and techniques in dealing with different types of risks. Furthermore, the study is also aims to identify the most important types of risk facing by the commercial banks in Sabah. The study is of value as it will expose the RMPs and provides insight to management on how to improve the risk practices management in the banks.
To implement the study, a set of questionnaire is distributed to the 9 major local own commercial banks in Sabah. The target population will be the staff in Credit Department in each of the banks' Business Centre. This is so because it is identified to have highly involved in dealing with risks thus the staff understands more about the risk and expected to be able to answer those questionnaires with minimal error.
Risk management is the policies, procedures, and practices involved in identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. A firm may use risk assumption, risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in proper management of future events (Bussiness Dictionary).
Problem Statement
In most commercial banks, risk management policies are a part of its corporate governance responsibility. Corporate governance is the structure and the relationships which determine corporate direction and performance. Each of the banks emphasizes risk management to be one of the important responsibilities to ensure the stability of its corporate governance. Thus, the Board of Director in each of the banks ensures that there is an ongoing process for identifying, evaluating and managing the significant risks carried out by the Group Risk Management Committee in the banks.
Risk Management Practices in a bank might includes understanding risk and risk management, risk assessment and analysis, risk identification, risk monitoring and credit risk analysis. The level of risk management practices among commercial banks might be different according to which factors weighted to be more significant for the banks.
Risk could heavily affect the performances and survival of a bank. Higher risk leads to higher return, and vice versa. It is not impossible for a commercial bank to incur losses instead of getting higher return if the risk is not managed efficiently. Risk leads more uncertainty to the outcomes of a business decision. Thus, higher return can only be achieved if the bank managed to control the high risk taken during decision making. Hence, there is a need to assess the risk practices management among the commercial bank as without proper risk management practices, the banks will most likely to incur more losses in the future.
To what extent do the commercial banks in Sabah use Risk Management Practices in dealing with various risks?
Research Objectives
To examine the extent to which the staffs of commercial banks in Sabah use Risk Management Practices in dealing with various risk.
To examine if the commercial banks in Sabah is effective in managing the risk or not.
To assess whether the commercial banks in Sabah has efficiently assess and analyze risk in general or not.
Research Questions
Do the commercial bank's staffs in Sabah understand risk and risk management?
Do the commercial banks in Sabah have efficient risk management?
Do the commercial banks in Sabah efficiently assess and analyze risk in general?
The Scopes of Study
This study will focus on examining the degree of risk management practices by the commercial banks in Sabah and their techniques in dealing with different types of risks. There are six applications of risk management practices analyzed in the study. This includes Understanding Risk and Risk Management (URM), Risk Identification (RI), risk Assessment and Analysis (RAA), Risk Monitoring (RM), Risk Management Practices(RMPs), and Credit Risk Analysis(CRA). All of this application of risk management practices will be investigated for each of the commercial banks in Sabah using a set of questionnaire.
This study will also provide insight to the banks or even other companies in improving the risk management practices in the management. Several statistical analysis is carried out such as regression analysis to explain these variables.
Limitation of research
Time Constraint
There are only about 4 month durations of times given to finish the research. Thus, due to the limited time given to complete this study, the researcher is unable to expand the research on state level which is the commercial banks in Malaysia rather than in Sabah.
Lack of Experience
As a student, the researcher has no experience and has only a little knowledge pertaining to the topic that the researcher wants to study. The researcher has only learnt about the topic during classes and has never conduct the real research study during classes. Thus, some of the information which are needed might be hard to acquired as the researcher is lack of knowledge on how to get the sources and also how to apply it into the study.
Financial Constraints
Since the researcher has not received any grants, therefore the researcher is unable to collect data which needs to be paid especially to acquire more journals. As the cost of implementing the study in state level is high, the researcher is unable to gather information in other commercial banks in state level, thus limits the research to be applied only commercial banks in Sabah.
Significance of the Study
To the Researcher
Upon completing this paper, the researcher will gain advantages such as gaining more knowledge as well as to obtain real life experience in carrying out a research. Through this study, the researcher is able to apply theories which gained during lectures. Besides that, it gives the researcher confidence and knowledge as preparation for working later on.
To Other Researchers
This study is also significant to all researchers for academic purpose. They may use this paper as their references and guidelines regarding the specific topic that they may want to investigate. This study might also be useful for the student who wants to conduct a study to complete the requirement of completing their courses in Bachelor level.
To the commercial banks
This study may also useful to the commercial banks especially in Sabah. As this paper examine the risk management practices of the banks, they can take further actions in order to improve the application of risk management in their companies. This study will also increase the awareness of risk management practices in the banks especially among the staffs in Credit Management.
CHAPTER 2
Literature Review
2.1 Previous Study
As risk management is crucial for the success and survival of a company, there have been a vast number of studies about risk management in general. However, according to Al-Tamimi and Al-Mazrooei(2007), the number of empirical studies on risk management practices in financial institutions was found to be relatively small.
Linbo Fan (2004) studied the efficiency versus risk in large domestic USA banks. He
found that revenue efficiency is not sensitive to liquidity risk or to the mix of loan products but is much influenced by the credit risk and insolvency risk.
Al-Tamimi and Al-Mazrooei (2007) investigated the degree to which the banks (including Islamic banks) of UAE use Risk Management Practices and techniques in dealing with different types of risk. Their study is the comparison of RMPs between national and foreign banks. The study found that the three most important types of risk facing the UAE banks are foreign-exchange risk, followed by credit risk and then operating risk. They also found that the UAE is efficient in managing risk. The results indicate that there is a difference between the national banks and foreign banks in the practice of risk assessment and analysis (RAA). Furthermore, the independent variables in the study are proven reliable. Using the Cronbach's alpha, which allows them to measure the reliability of the variables, they found that all of the variables have good indication of construct reliability.
Abul Hassan(2009) examined the degree to which Islamic banks in Brunei Darussalam use RMPs and techniques in dealing with different types of risk. He found that Islamic banks in Brunei are mainly facing three types of risk and they are foreign-exchange risk, followed by credit risk and operating risk. Furthermore, the study found that as per the survey report, the most important methods of RI chosen by more than 90 percent of the respondents are inspection by Shari'ah supervisors, executive and supervisory staff, audit and physical inspection, financial statement analysis and risk survey. The study also indicates Islamic banks in Brunei Darussalam are reasonably efficient in risk assessing and analysis (RAA), RM and RI. The results of the study show some evidence of efficiency in credit risk management within the Islamic banking industry in Brunei Darussalam.
Thus this study aims to investigate the degree to which local own commercial banks in Sabah use Risk Management Practices (RMPs) and techniques in dealing with different types of risks. Six aspects of Risk Management Practices which are Understanding Risk and Risk Management (URM), Risk Identification (RI), risk Assessment and Analysis (RAA), Risk Monitoring (RM), Risk Management Practices (RMPs), and Credit Risk Analysis (CRA) is the independent variables that explain the degree of Risk Management Practices by the commercial banks in Sabah. This study is important as without proper Risk Management Practices by a company, their success and survival in the market will be threated.
CHAPTER 3
3.0 RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
A research design is a framework or blueprint for conducting the business research project. There are six elements in research design. These includes the purpose of the study, the types of investigation, the extent of researcher interference, the study setting, unit of analysis and the time horizon. The research design is essential in a research study as it guides the researcher towards completing a good study.
3.1.1 The purpose of the study
The purpose of a study can be an exploratory study, descriptive study or hypotheses testing study. It depends on the stage to which knowledge about the research topic has advanced (Sekaran, 2003). As in this study the researcher used the exploratory study. Exploratory study is conducted when there are some identified facts, but more information is needed for developing a good theoretical framework or to better comprehend the nature of the problem. This study is about the risk management practices among commercial banks in Sabah. Thus, the reason why the researcher chooses to implement the exploratory study is to develop more information about the extent to which the staffs of commercial banks in Sabah use risk management practices in dealing with various risks. As this study involves qualitative measure where data is collected through questionnaires, the exploratory study needs to be conducted.
3.1.2 Types of investigation
The types of investigation can be causal study or correlational study. For the purpose of this study, the researcher used correlational study. The correlational study is actually conducted when the interest of a study is only a mere identification of the important factors related with the problem. In this research, the interest is to identify the extent to which the commercial banks in Sabah are aware with its risk management practices. Thus, correlational study is suitable for the purpose.
3.1.3 The extent of research interference
The extent of research interference of a study depends on whether it is a causal study or correlational study. As this research is a correlational study, therefore, the study is conducted with minimal interference where the study is conducted with normal flow of work in the organization. As the study use qualitative measure, the questionnaire are distributed to the staffs of Credit Management in the banks where there is a normal flow of works as ordinary.
3.1.4 Study setting
The study setting is the place or environment where the study is being conducted. Organizational research can be done in contrived setting or noncontrived setting. Thus, for the purpose of this study, the researcher conducted the research in noncontrived setting, a natural environment, where work proceeds normally. It is also called the field study. In this study, the researcher needs the questionnaire to be completed by the staffs of the banks. The staffs of the banks can complete the questionnaire when they are available and this will only require minimal interference.
3.1.5 Unit of analysis
The unit of analysis refers to the level of aggregation of the data collected during the subsequent data analysis stage. The unit of analysis can be individuals, dyads, groups, organization, and cultures. The problem statement of this study focuses on examining the extent to which the staffs of commercial banks practices risk management in their daily working in the bank, thus, the unit of analysis for this study is individual. The researcher needs to distribute the questionnaires to each of the staffs in Credit Management in the banks.
3.1.6 Time horizon
Time horizon refers to the duration of times the data for the study is taken. Time horizon for a study can be cross-sectional studies and longitudinal studies. For this study, where data are gathered just once, thus the time horizon for the study is cross-sectional studies. The questionnaire was distributed to be completed by the staffs in the banks over three days and was collected at once in the third day.
3.2 DATA COLLECTION METHOD
Data collection methods are very essential in a study. There are three main methods of data collections. These include interviewing, administering questionnaire, and observing people or phenomena. In this study, the researcher administered questionnaires to collect data.
3.2.1 Primary Data Collection.
Primary data refers to information which is obtained firsthand by the researcher. In this research the primary data collection is through administering questionnaires.
3.2.1.1 Questionnaires
A questionnaire is a preformulated written set of questions to which respondents record their answer, usually within rather closely defined alternatives (Sekaran, 2003). A set of personally administered questionnaires is distributed to the staffs in Credit Management of the banks in its Business Centre. The questionnaire is divided into two sections:
Section A which includes four questions on demographic characteristics of the respondents using Nominal Scale. The researcher chose this types of questionnaire for this section because it is suitable and allows the researcher to assign subject to certain categories or group.
Section B which consists of 42 questions using the Five Points Likert Scale.
Section B.1 includes eight questions which correspond to the understanding risk and risk management (URM).
Section B.2 includes five questions which correspond to Risk Identification (RI).
Section B.3 includes seven questions which correspond to risk assessment and analysis (RAA).
Section B.4 six questions includes five questions correspond to risk monitoring (RM).
Section B.5 includes seven questions correspond to Credit Risk analysis(CRA).
Section B.6 includes ten questions which correspond to credit risk analysis (CRA) risk management practices (RMPs).
Respondents were asked to indicate their degree of agreement with each of the questions on a seven-point Likert scale. The Likert Scales is used in this study because the variables in this study are measured in qualitative approach where its purpose is to measure the extent of agreement, hence is suitable for the study.
3.2.2 Secondary Data Collection
Secondary data refers to information gathered other person other than the researcher conducting the current study (Sekaran, 2003). Secondary data can be acquired from the internal or external of the organizations. The source of secondary data can be collected from the books, journals, government publications of economic indicators, statistical abstract, magazine, websites and other archival record.
In this research, the secondary data is acquired from journals in Emerald Publications, Books, annual reports of the commercial banks involved and also website of the companies and other related articles in the internet access. This secondary data is important for literature review for the research as well for obtaining other related information which is needed.
3.3 SAMPLING
Sampling is the selection of sufficient numbers or items of elements from the population so that the properties of the sample ( statistic) could be generalized to the population. Sampling is done in a research as self-evident, it reduce the difficulties to collect data from the whole populations. It also produces reliability of the study as the samples represent the whole population in the study.
3.3.1 SAMPLING TECHNIQUE
There are two types of sampling techniques; probability sampling and non-probability sampling. In this research, the researcher used probability sampling where each elements in the population have a known chance of being chosen as subjects in the sample (Sekaran,2003).
Probability sampling consists of simple random sampling or complex sampling. For the purpose of this study, the researcher used the simple random sampling where every single element in the population has a known and equal chance of being selected as the sample. Thus, in this study, every staffs in the commercial has a known and equal chance of being selected as the respondents for the administered questionnaires.
3.3.2 POPULATION
Population is a listing of all elements in the population from which the sample is drawn (Sekaran, 2003). The population in this study is the staffs of commercial banks in Sabah in Credit Management.
3.3.3 SAMPLE SIZE
A sample is a subset of the population. In this study, due to the time constraints and high cost of conducting the research, the researcher has drawn a sample size according to Uma Sekaran' s table for a given population size.
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Table 1: Sources from Research Methods For Business by Uma Sekaran publication of 2003
Commercial Banks
Populations
Affin Bank Berhad
21
Alliance Bank Berhad
17
AmBank Berhad
22
CIMB Bank Berhad
21
Eon Bank Berhad
19
Hong Leong Bank Berhad
18
Malayan Banking Berhad
19
Public Bank Berhad
19
RHB Bank Berhad
21
Totals
177
Figure 2: The total population of the staffs of commercial banks in Credit Management of Business Centre only.
Based on Figure 2, the population of staffs in Credit Management of the Commercial banks' Business Centre only is 177, thus the researcher chose to draw 180 populations. From table 1, when the 'N' population is 180, the sample size is 123. Thus, the sample size for this study is 123 staffs. Therefore, 123 set of questionnaires has been distributed to be completed by the staffs in Credit Management of Business Centre of the commercial banks.
3.4 HYPOTHESIS
3.4.1 The relationship between the RMPs and Understanding Risk and Risk Management (URM)
H0: There is a relationship between RMPs and Understanding Risk and Risk Management (URM).
H1: There is no relationship between RMPs and Understanding Risk and Risk Management (URM).
3.4.2 The relationship between the RMPs and Risk identification(RI)
H0: There is a relationship between RMPs and Risk Identification (RI)
H1: There is no relationship between RMPs and Risk Identification (RI)
3.4.3 The relationship between RMPs and Risk Assessment and Analysis (RAA)
H0: There is a relationship between RMPs and Risk Assessment and Analysis (RAA).
H1: There is no relationship between RMPs and Risk Assessment and Analysis (RAA).
3.4.4 The relationship between RMPs and Risk Monitoring (RM)
H0: There is a relationship between RMPs and Risk Monitoring (RM).
H1: There is no relationship between RMPs and Risk Monitoring (RM).
3.4.5 The relationship between RMPs and Credit Risk Analysis(CR)
H0: There is a relationship between RMPs and Credit Risk Analysis (CR).
H1: There is no relationship between RMPs and Credit Risk Analysis (CR).
3.5 DATA ANALYSIS AND INTERPRETATION
3.5.1 Frequency Distribution
Frequency distribution is a tabulation of the values that one or more variables take in a sample. Frequency distribution is obtained for all the demographic characteristic and classification variables.
3.5.2 Descriptive Statistic
Descriptive statistic refers to the data of maximum, minimum, means, standard deviations and variance. It is used to describe the statistics. The interval-scaled independent and dependent variables is described through this statistic.
3.5.3 Reliability Analysis
To measure the reliability of the independent variables in this study, the interim consistency or the Cronbach's Alpha reliability coefficient of the six independent variables were obtained. It is a reliability coefficient that indicates how well the variables this study are positively related to one another.
3.5.4 Regression Analysis
Using the Statistical Package for Social Science (SPSS), the below data is acquired.
3.5.4.1 Coefficient of Correlation (r)
It is used to measure the closeness of the linear relation between variables. It indicates the strength and direction of a linear relationship between two variables. The value of r can be varied whether positive or negative and lies between negative 1 and positive 1 (1≤ r ≥ 1).
3.5.4.2 Coefficient of Determination (R-squared, R2)
R2 acts as a tool to determine the percentage of variation in the dependent variable that can be explained by independent variables. It indicates how well the regression fits the data. The higher the percentage of R2 the more significant the relationship between the variables.
3.5.4.3 T- test
T-test will determine if there is a significant relationship between dependent and independent variables whether it is positive or negative relationship. If the calculated t-test is more than 2 (based on the rule of thumb), there is a significant relationship between the two variables.
3.5.4.4 F-test
It is used to test whether the independent variables as a group are significant or not in determining the dependent variable. If the calculated F-value is greater than F-critical value, then the independent variables as a group are significant in determining the dependent variables.
3.6 THEORETICAL FRAMEWORK
Understanding Risk and Risk Management (URM)
Risk Assessment and Analysis (RAA),
The degree of Risk Management Practices (RMPs) by commercial banks in Sabah.
Risk Identification (RI)
Risk Monitoring (RM),
Risk Management Practices (RMPs),
DEPENDENT VARIABLES
Credit Risk Analysis (CRA).
INDEPENDENT VARIABLES
2.1.1 Dependent variable
The researcher uses the degree risk management practices in commercial banks in Sabah as the dependent variable.
2.1.2 Independent variables
The researcher uses the application of risk management such as Understanding Risk and Risk Management (URM), Risk Identification (RI), Risk Assessment and Analysis (RAA), Risk Monitoring (RM), Risk Management Practices (RMPs), and Credit Risk Analysis (CRA) as the independent variables.
