The strategic configurations as a contingency factor in the success of operational risk measures

• Published date: 01 September 2018
• Date: 01 September 2018
• DOI: http://doi.org/10.1002/jsc.2234
• Author: Walter Amedzro St‐Hilaire

RESEARCH ARTICLE

The strategic configurations as a contingency factor in the

success of operational risk measures

Walter Amedzro St-Hilaire

1,2,3,4

1

PRISM-Paris 1, Panthéon Sorbonne, Paris,

France

2

ExpertActions ExiGlobal Group, Toronto,

Canada

3

Chair in Institutional Governance and

Strategic Leadership Research, Québec,

Canada

4

Telfer Management School, University of

Ottawa, Ottawa, Canada

Correspondence

Walter Amedzro St-Hilaire, Chair in

Institutional Governance & Strategic

Leadership Research, 1702-285 Rue Laurier,

Gatineau, Québec J8X3W9, Canada.

Email: a.st-hilaire@telfer.uottawa.ca

Abstract

The loan loss provisions and risk measures may be needed to examine the repercussions on the

advancing approach profitability. The more loan loss provision, capital adequacy ratio, and risks

measures are accurate, the more banks can enhance their profitability and cater the need of

their target audience. Loan loss provisions are increasing in the tax rate for countries that permit

general provision tax deductibility. They have a negative relationship with profitability of finan-

cial institution.

1|INTRODUCTION

Profitability is essential for a well-functioning banking sector which

leads to a progressive and well-functioning country with the aid of

economic growth. There is no doubt that a well-established and flexi-

ble banking system is one of the leading pillars for economic growth

of any country (Inequality, Punjab, View & Tahir, 2015).

This study investigates the influence of Risks and Loan Loss Pro-

visioning on the profitability and advancing approach of commercial

banks in Nigeria and South Africa for the period 2011–2015. This

exploratory study is supported by the factual finding from two coun-

tries by considering some variables in the banking sector. Although

both countries have a different culture, growth rate, inflation rate,

interest rate, and exchange rate, still, this work is used to identify sig-

nificant factors that should be combined for the proper functioning of

these critical institutions.

This study is mainly motivated by the fact that Loan Loss Provi-

sions do impact the profitability of banks as also studied in the previ-

ous research (Inequality et al., 2015) in which authors concluded that

the loan loss provision has a negative relationship with profitability.

In fact, LLP impacts negatively the income and therefore, the

profitability ratio tends to decrease mechanically: the highest they are,

the lowest is profitability. But the reason behind this study, was to

understand the relationship of Loan Loss Provision with risk and its

impact on Profitability and resultant consequences on Advancing

Approach of banks. And as far as policymakers are concerned they

can correlate the provision policies and risk measures adopted by the

foreign banks as a guidance and benchmark to stabilize and further

strengthen the banking sector of the economy, in Nigeria.

There are five principal risk measures, and each measure provides

a unique way to assess the risk present in investments that are under

consideration. The five measures include the α,β,R

2

, standard devia-

tion, and Sharpe ratio. Risk measures can be used individually or

together to perform a risk assessment. When comparing two potential

investments, it is wise to compare like for like in order to determine

which investment holds the most risk.

The risk of loss resulting from inadequate internal procedures or

staff, systems, or external events (includes legal risk, but excludes stra-

tegic risks or reputation as well as indirect losses). In our methods, the

exposure indicator is total gross income, which is not totally satisfac-

tory, but contra-cyclic. In all cases, the banks in our sample are

equipped with a database and set up a surveillance and risk manage-

ment function.

Loan Loss Provision are a buffer to preserve a bank's solvency by

absorbing current and estimated future credit losses in its business

(Cummings & Durrani, 2016). State Bank of Nigeria governs banking

sector of Nigeria (SBP), and all scheduled banks are bound to follow

the guidelines prescribed.

The Prudential Regulations guidelines are mentioned in SE-8:

Classification and Provisioning for Loans/Advances (SME SBP, 2011).

DOI: 10.1002/jsc.2234

Strategic Change. 2018;27:495–503. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 495