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Risk Management Practice In Commercial Bank Of Ethiopia


This chapter is the appraisal of writing on chance administration within the budgetary segment managing an account with uncommon reference to risk management. It talks almost risk management issues from assorted perceptions, with the point of view of giving a theoretical establishment to the ponder. It begins with a clarification on risk management, looked for after by appraisal of composing on the bases and sorts of risk administration exercises and in expansion the sorts of risk that the bank confront.

In generally this chapter include the topice mentioned as below. Such as:- sorts of hazard in keeping money division:- credit hazard, market chance, liquidity hazard, reputational chance, Objectives of hazard management:- pre-loss & post misfortune destination. Source of chance:- physical environment, legal environment, political environment, operational environment, Stpes of risk management process and risk management in banking. In addition objectives of the study and research questions are also included.


Bank is the place in which makes the negotiations in between two institutional sector or persons such as money savers and money borrowers those uses for investing in the business sectors (Koomson, 2011; Kanchu and Kumar, 2013).

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It will be expect different types of risks in banking sectors. The following terms are some explanation of the difference types of risk happen in the banking sectors.

Credit Risk

Credit risk is the extend of overseeing and reflecting the critical for money related institution. A few of these related to the credit chance an organization have ethicalness of its format, while the rests are related to the method in which credit chance is taken.

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In other case credit risk is additionally define as the capacity to distiguish in advertise esteem and net pay from the result of non-payment. Credit risk is a shape enhance by credit risk management framwork difference from credit metrics, which look for cultivate framework. It is focused and calculate the foreign direct investment necessary attempts to estimate the expected loss of loans and the distirbution of a certain levels (Anthony saundars, 2014:348).

Market risk

Market chance is closely connected to intrigued rate chance, credit risk and remote trade chance in that as these dangers increment or diminish. General risk of the FI is influenced abstractly its exchanging portfolio can be isolated from its wander to the introduction of time horizon and assistant promote liquidity. Its includes resource and liabilities are relatively illiquid to held for longer holding periods.( Saunders, A. (2014).

According to (John, August 25, 2015), stated that market risk is the potential for cost changes in the advertise to result in venture misfortunes. Its depending on the cause of risk market risk can be categorized in to four types. These are:

Interest rate risk:- the costs of most resources are touchy to changes in intrigued rates.

Commodity risk:- product costs can too take after long cycles meaning that costs can stay hoisted or discouraged for amplified periods of time.

Exchange rate risk:- exchange rates can be alter quickly as they are influenced by a wide extend of political and financial conditions.

Equity risk:- the chance related with stock costs.

Liquidity Risk

The most methods for overseeing all liquidity chance is to activelly screen liquidity needs. This ought to be done inside and over ligitimate substances permitting for lawful, administrative and operational confinements to the exchange of liquidity. Market liquidity chance can be overse through the venture procedure. This cruel that the development plan of liability must be born in intellect when a portfolio putting together.

Madura Jeff (2006:159) stated that liquidity chance is the potential misfortune that seem occure as a result of changing over an speculation to cash. Liquidity risk emerges for two reasons, such as obligations side reason as well as an resources side reason. The obligations side risk occurce when an FI’s obligation holders, such as investors or protections arrangement holders look for to cash in their budgeetary claims immidiatly when obligation holders request cash with drawing stores (Tony Saunders (1998:277).

Reputational Chance

Reputational chance is the bank notoriety that’s probable to devastate share holder esteem. Reputational risk leads to negative exposure, misfortunes income, case, misfortune of client and partner’s, exists key representatives, share cost decays and trouble some in selecting ability. Kuwait Chapter Arabia Diary of Commercial Administration Audit, Vo1-1, No 10 June 2012

Objective of Hazard Administration

Hazard administration has imperative destinations. These destination have classified in to two sorts. Such as:

Pre- loss objective: important objectives some time recently a misfortune occure incorporates economy, decrease of uneasiness, and assembly legitimate commitments.

Post loss objective: – risk administration has too a certain objectives After misfortune occures. These destinations incorporates survival, proceeded operation, solidness on earnings, proceeded development, and social duty.( Rejda, 1931, p 42-43)

The Source of Risk

The source of risk are the figure of opportunity or risks that which are contribute to positive or negative out comes. This source of risk can be isolated in to distinictive ways, these includes:

Physical environment:- it is the elemental source of risk, such as soil quachs, intemperate rain drop or draft can leads to misfortune which are physical environment.

Legal environment:-the anticipated law and headings may be issude by the government which may render the risk environment to the commerce working in to nation.

Political environment:- inside a single nation, the political environment can be critical source of chance. Over again party comes move a country in to approach specifically that might have emotional impact specific organization.

Operational environment:-prepare and strategy of the organization produce risk and instability. A formal method for advancing enlisting or filling workers may create a lawful risk. The fabricating handle may put representatives are risk of physical hurt. (Mark R.Gereene C, 1991)

Some Steps of Risk Management Process.

According to (Rejda, 2011, p: 45) stated that there are four steps within the risk administration handle. Such as:

Step 1 – Identify loss exposure

Step 2- Analyze the misfortune exposures

Step 3 – Preferable the fitting strategies for serveing the misfortune uncovering like

Hazard control

· Avoidence

· Loss avoidance

· Loss decline

Risk funding

· Retantion

· Non-insurance interpretation

· Commercial protections

Step 4 – are execute and screen the hazard administration program.


Risk management create from a stemly managing an account action, connected to an outstandingly solid course of action of measures and fabric within the show day budgetary environment. This underlines the way that carry on with presence of an institutions depends fantastically on its capabilities to anticipate and orchestrate for the change as confined to essentially sitting compact the modify and respond to it (Allen, L., & Saunders, A. (2010)) any exchange done by the bank then again impact the profile of the bank in this way making a near frail risk to deliver continuous chance enhancement.

Goals of the ponder

In general the objective of this ponder is to evaluate and analyze the accomplishment of chance administration hone of selected Ethiopian Commercial banks and cautious audit of the most targets leads to the advancement of the following particular objective.

  • · To recognize the major exposures of chance to the bank.
  • · To decide the most excellent conceivable method in arrange to decrease risk.
  • · To analyze the most procedure and devices of risk management.

Research Questions

  1. How does the risk management supply as the source of the competetive advantage of commercial bank of Ethiopia?
  2. What are the preventive techniques and control procedures of risk management process in Ethiopia commercial bank?
  3. What are the problems confronted in overseeing the different component of chance administration at commercial bank of Ethiopia?


  • · Allen, L., & Saunders, A. (2010). Risk management in banking. In The Oxford handbook of banking. Oxford University Press Oxford.
  • · Kanchu, T., & Kumar, M. M. (2013). Risk Management in Banking Sector-an Empirical Study. International Journal of Marketing, Financial Services & Management Research, 2(2), 145-158.
  • · Kuwait Chapter Arabia Diary of Commercial Administration Audit, Vol-1, No 10 June 2012
  • · Madura Jeff, (2006) personel finance, 3rd edition, p, 159
  • · Mark R.Gereene C (1997) Risk and Insurance 4th Edition.
  • · Opoku-Adarkwa.O.R. (2011), Risk Management and Bank performance.
  • · posted by John Spacey, August 25, 2015
  • · Rejda, G. E. (2011). Principles of risk management and insurance. Pearson Education India, p, 45
  • · Saunders, A. (2014). Financial markets and institutions. McGraw-Hill Higher Education.
  • · Tony Saunders,( 1998) to millons & the cornetts, especially galen marcia millon cornet to my father, Myer Saunders, p,277

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Risk Management Practice In Commercial Bank Of Ethiopia. (2019, Dec 17). Retrieved from

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