Introduction

Risk in banking refers to an exposure to unpredictability of the outcome that contains a probability of
variation in the desired or expected returns defines risk in banks as a potential loss that may occur due to
some antagonistic events such as economic downturns, adverse changes in fiscal and trade policy,
unfavorable movements in interest rates or foreign exchange rates, or declining equity prices.

Risk in banking refers to exposure to unpredictability of outcomes and potential loss due to adverse
events such as economic downturns, changes in fiscal and trade policy, interest rate fluctuations, and
declining equity prices.

Risk in banking is also described as undesirable impacts on returns due to various sources of
uncertainties, which depend on real-world situations and external environmental factors. The National
Bank of Ethiopia (NBE) classifies banking risks into expected losses and unexpected losses. Expected
losses are those that can be anticipated with reasonable certainty, such as loan losses, while unexpected
losses arise from unforeseen events, such as economic downturns or fluctuations in interest rates or
foreign exchange rates. Statistically, risk is described as the probability of an adverse outcome, standard
deviation (SD), or variance. The National Bank of Ethiopia (NBE) identifies several types of risks in the
banking industry, including credit risk, market risk, liquidity risk, operational risk, reputation risk,
regulatory risk, and legal risk and we describe each in detail.

Some identified types of risk in banking industries.

The National Bank of Ethiopia (NBE) identifies several types of risks in the banking industry, including
credit risk, market risk, liquidity risk, operational risk, reputation risk, regulatory risk, and legal risk and
we describe each in detail

1. Credit risk: This is the risk of potential losses arising from the failure of borrowers to repay their loans
or meet their contractual obligations. Bank are exposed to credit risk through its lending activities and
investments in debt securities.

2. Market risk: This refers to the potential losses that can arise from adverse movements in market
variables such as interest rates, foreign exchange rates, equity prices, and commodity prices. Awash Bank
is exposed to market risk through its trading activities, investments in financial instruments, and interest
rate-sensitive assets and liabilities.

3. Operational risk: This is the risk of losses resulting from inadequate or failed internal processes,
systems, or human factors. It includes risks related to fraud, errors, technology failures, and disruptions in
business operations. Awash Bank faces operational risks in its day-to-day operations, including
transaction processing, information security, and compliance with regulatory requirements.

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4. Liquidity risk: This is the risk of being unable to meet financial obligations as they become due
without incurring unacceptable costs or losses. Awash Bank faces liquidity risk if it cannot access
sufficient funding to meet its obligations or if it faces unexpected cash outflows.

5. Compliance risk: This refers to the risk of legal or regulatory sanctions, financial loss, or reputational
damage arising from non-compliance with laws, regulations, or internal policies. Awash Bank faces
compliance risks related to anti-money laundering (AML) and know-your-customer (KYC) regulations,
data privacy laws, consumer protection laws, and other regulatory requirements.

6. Strategic risk: This is the risk of losses arising from poor strategic decisions or the failure to adapt to
changes in the business environment. Awash Bank faces strategic risks related to changes in customer
preferences, technological advancements, competition, and macroeconomic conditions.

7. Reputational risk: This is the risk of damage to the bank's reputation resulting from negative public
perception or loss of trust and confidence. Reputational risks can arise from various factors such as poor
customer service, unethical behavior, data breaches, or involvement in illegal activities.

8. Technology Risk
Describes the technology risk in banks as the imperfections of information systems and systems failures
caused by virus attack, network failure, hacking, poor system integration and lack of skills.

The Process of Risk Management

Risk management process involves the stages such as the identification of possible risks that may be
encountered by the banks, the digitizing, analyses, supervision and reporting of the determined risks by
using appropriate risk measuring methods, setting up of risk policies and determining the risk
management decisions that will be applied against the risks and assessing the results of the risk
management policythe different variables to investigate risk management practices in local contexts as
Risk Understanding, Risk Identification, Risk Monitoring and Controlling,
Managing Credit Risk, Managing Liquidity Risk and Managing Operational Risk). These analyses are
aimed at answering specific research questions focusing on the evaluation of the level of risk management
practice Awash Bank S.C.

Awash Bank employs various risk management techniques and controls to identify, assess, mitigate, and
monitor these risks across its operations.

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Awash Bank practices several risk management and control principles to effectively control risks. These
include:

Risk identification: The bank has established risk management committees and departments responsible
for identifying and assessing various types of risks, such as credit risk, market risk, operational risk, and
compliance risk. This ensures that all potential risks are identified and understood. The bank carries out a
compressive and systematic identification of its risks relating to each of its declared aims and object The
bank has developed and applied procedures for the systematic identification of opportunities.

Identification of changes in risks and the bank's roles and responsibilities, and ability to be aware of the
strengths and weaknesses of other banks' risk management systems received a higher score. However, the
difficulty in prioritizing its primary hazards and employing the most complex risk assessment
methodologies received a middling score. That indicates a lack of risk identification and the use of
advanced risk identification methods.

Risk assessment: Awash Bank conducts thorough assessments and due diligence on borrowers to assess
their creditworthiness and ability to repay. The bank also monitors its loan portfolio regularly to identify
any potential credit quality issues. Additionally, the bank assesses market risks arising from changes in
interest rates, foreign exchange rates, and other market variables.

Risk mitigation: The bank implements risk mitigation strategies to reduce the impact of identified risks.
For credit risk, Awash Bank sets credit risk limits and closely monitors its loan portfolio to address
potential credit quality issues. In managing market risks, the bank uses hedging strategies and risk
mitigation techniques to minimize its exposure to adverse market movements.

Internal controls: Awash Bank has robust internal control systems in place to ensure the integrity and
accuracy of its operations. These controls help prevent and detect errors, fraud, and other operational
risks. The bank also regularly reviews and updates its policies and procedures to align with regulatory
requirements and best practices. Monitoring the effectiveness of risk management is an integral part of
routine management reporting

Compliance management: Awash Bank has a dedicated compliance department responsible for ensuring
adherence to applicable laws, regulations, and internal policies. The bank conducts regular compliance
reviews and assessments to identify any potential compliance risks and takes appropriate actions to
address them.

Monitoring and reporting: The bank has established processes for ongoing monitoring and reporting of
risks. This includes regular reporting to senior management and the board of directors on the status of
identified risks, their mitigation measures, and any emerging risks that need attention. Monitoring the
effectiveness of risk management is an integral part of routine management reporting. Awash bank S.C.

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has been addressed based upon the overall mean score of the nine items regarding risk monitoring and
controlling. Risk management may entail selecting alternate solutions, putting in place a contingency
plan, taking remedial action, or re-planning the activity. The risk response owner should report to the
project manager and the risk team leader on the success of the plan, any unexpected consequences, and
any mid-course corrections required to minimize the risk on a regular basis.

Managing Operational Risk

Specifies that board and executive management of the in Awash bank S.C. recognize, understand and has
defined all categories of operational risk applicable to their institutions. The overall week Managing
Operational Risk in Awash bank S.C. situations for instance political uncertainty, long hours load-
shedding and other such factors have enhanced the level of all these risks in Awash bank S.C.

The operational risk is related to the likelihood of inverse effects on the financial performance as well as
the capital of bank that is the outcome of staff members’ negligence, inadequate internal processes and
inapt management information systems or unpredictable and undesirable external events (Kanchu and
Kumar, 2013). The operational risk mostly emerges from the inside activities of bank unlike some other
forms of risks like market and credit risk. However, a number of sources of operational risk come from
the external environment such as competitive actions, natural disasters (such as floods, earthquakes) and
terrorist attacks which are largely unpredictable and uncontrollable by banks

The operational risk mostly emerges from the inside activities of bank unlike some other forms of risks
like market and credit risk. However, a number of sources of operational risk come from the external
environment such as competitive actions, natural disasters (such as floods, earthquakes) and terrorist
attacks which are largely unpredictable and uncontrollable by banks

Managing Liquidity Risk

According to NBE (2020), this risk is the potential loss caused by a private bank’s inability to meet its
obligations. The liquidity risk arises due to several reasons including a rapid increase in the sudden
demand of the bank’s depositors and an inadequate market depth or market disruption. In other hand,
Croupy, Galai and Mark (2006) argue that the insufficient liquidity can provoke a bank towards
unexpected cash deficiencies which are needed to be covered at exorbitant costs and decrease
profitability. Finally, the liquidity risk in Awash bank S.C. also found instating to keep up the several
financial risks such as market risk, interest rate risk, credit risk, strategic to provokes interest rate risk due
to unknown rates of future funding and investment in Awash bank S.C.

Managing Credit Risk

Awash bank S.C. found eliminate the credit risk through effective risk management that contains a
comprehensive credit risk analysis based on scanning and monitoring of the most trustworthy loan
applications, the degree of collateral, diversification of the loan portfolio, accurate loan pricing depending
upon the borrowers repay ability and intentions. Therefore, active enjoyment and understanding risk
management would minimizing losses by assessing the adequacy of a bank's capital and loan loss reserves
at any one moment that has long been difficult for financial institutions to understand.

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The bank has adopted a standard reporting system about the risk management form bottom to top
management. Reporting and communication processes within the bank support the effective management
of risk The bank’s response to risk includes an evaluation of the

effectiveness of the existing controls and risk management responses . The bank’s response to risk
includes action plans in implementation decisions about identified risk. The bank effectively monitors the
credit limit of everyone counterparty. The bank reviews the country ratings on regular basis for its
international financing and investment. The borrower’s business performance is regularly observed by the
bank following the extension of financing

By implementing these risk management and control principles, Awash Bank ensures that risks are
effectively controlled, mitigated, and monitored across its operations. This helps maintain the safety and
soundness of the bank while minimizing potential losses and disruptions.

Managing technology risk

Awash Bank has established a robust technology risk management framework to identify, assess, and
mitigate technology-related risks. The framework includes policies, procedures, and controls to address
various aspects of technology risk, including cyber security, data privacy, system availability, and
compliance with regulatory requirements.

The bank provides regular training and awareness programs for its employees to educate them about
technology risks and best practices for mitigating these risks. This includes training on cyber security
awareness, data protection, and incident response protocols. Overall, Awash Bank's proactive approach to
managing technology risks is commendable, and its efforts in this area are crucial for maintaining the
trust and confidence of its customers while ensuring the security and stability of its operations.

Conclusion
This analysis highlighted credit risk, operational risk, foreign currency risk, and liquidity risk as
significant types of risk. These data suggest that increasing risk monitoring and control enhances
the effectiveness of risk management systems. Even though the firm's management had a high degree of
risk understanding and risk identification, risk monitoring and control were insufficient. Despite the
bank's use of a systematic risk identification approach for risk identification, assessment, and control, it
was difficult for them to identify their main risks. A positive relationship between market risk
management and risk management approaches was discovered. These data imply that minimizing
liquidity risk is another critical component of increasing effectiveness. The discovery found a significant
direct correlation between managing liquidity risk and risk management practices, meaning that it is
necessary for management to dedicate more attention to dealing with liquidity risk in order to improve
local banks' risk management practices.

Recommendations

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Bank managers should focus on liquidity controlling since controlling liquidity risk is an important
component of improving the effectiveness of Awash Bank S.C.'s risk management methods, banks must
maintain a continuous monitoring process to ensure the integrity of risk management controls and
systems at all times in order to stay ahead of the competition.

Sophisticated and rigorous management strategy should be considered by the managers of the bank since
risk understanding, risk identification, risk measurement and analysis, risk monitoring and control,
managing credit risk are vital activities in the bank and they are interrelated with liquidity problems.
Moreover, risk management are required to implement a comprehensive and rigorous risk management
structure that encompasses all activities that affect their risk profiles and consists of identifying,
assessing, analyzing, monitoring, and controlling key risks such as credit risk, market risk, liquidity risk,
and operational risk.

Reference

Awash Bank Annual Reports

Interviews with Awash Bank Risk Management Team

Central Bank of Ethiopia Guidelines on Risk Management

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