CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
This chapter gives an overview of the literature of other
researchers and writers about risk management. However key words are well
explained and theories are discussed. The historical back ground of risk
management is explained, dangers and benefits of implementing a risk management
plan, challenges of risk management and the current trend of risk
management.
2.1 Overview of Risk Management
The entire history of the human species is a chronology of
exposure to misfortune and adversity of efforts to deal with risks. Although it
is perhaps an exaggeration to claim that the earliest profession was risk
management, it can be argued that from the dawn of their existence, humans have
faced the problem of survival, not only as individuals but as species. The
initial human concern was a quest for security and avoidance of the risks that
threatened extinction. Our continued existence is testimony to the success of
our ancestors in managing risk (Emmett, 1997).
The real risk management record is from Babylon in the code of
Hammurabi, dating from around 2100 BC (Sadgrove, 2005). This concerned a form
of naval insurance whereby the owner of the vessel can borrow money to buy
cargo and does not have to pay the debt if the ship is lost at the sea. Until
recently insurance was still the main way that companies managed risk. Thus in
1960s and 1970s insurance companies sought to reduce their potential losses by
encouraging businesses to make their premises safer. This was the
«1st age» of risk management. Currently, insurance desire
other aspects for risk management.
Businesses considered only non entrepreneurial risk (such as
security). They also used risk reactively, to see how much insurance they
should buy. In 1980s, businesses started to introduce quality assurance, to
ensure that products conformed to their specifications. This was heralded by
the British Standard Institutions (BSI) launching the quality standard BS5750
in 1979. In this, the «2nd age» of risk management,
companies treated risk in a more proactive or preventive way (Emmet, 1997).
In 1993, James Lam became the world's first Chief Risk
Officer, at the US financial services firm GE capital.
The «3rd age» of risk management arrived
in 1995 with the publishing by Standards Australia of world's risk management
standard, AS/NZS4360: 1995, which has now been updated three times. This was
followed by the Canadian standard, CAN/CSA-Q850-97 (Fone & Young, 2000).
It is not known when exactly risk management was used in
Africa in general and in east Africa in particular but, really, as in the
middle-east and Europe. Africans also had their ways of handling risks and
issues even though data were not recorded like other parts of the world because
of illiteracy. For instance, in the field of prediction and early warning of
disasters, the Luo community in the Lake Victoria basin had a large number of
climate monitoring indicators that enabled them to tell such things as the
right time to start planting in anticipation of the rains or to preserve and
store food in anticipation of a dry season. These indicators included
observation of the behaviour of animals, birds, reptiles, amphibians, insects,
vegetation and trees, winds, temperatures and celestial bodies. In the area of
animal health, the Maasai, who inhabit both Kenya and Tanzania, had at least
half a dozen different medicinal plants for treating East Coast Fever alone in
cattle. In farming technologies, the Matengo people, believed to have lived in
the steep slopes of Matengo Highlands since the Iron Age, had developed a
sophisticated system that enabled them to grow crops on hillsides while at the
same time controlling soil erosion and improving soil moisture and fertility.
For example, the Banyala community in Budalang'i living on the shores of Lake
Victoria had a well-organized system for mitigating impeding disasters. There
were elders who dealt with rainfall prediction and early warning. Each
homestead had a dugout canoe ready for transport in case of heavy flooding.
Each community was also required to dig trenches to control the water around
the homestead and around farmlands. In addition, they were required to avoid
ploughing along the lake shores when heavy flooding was predicted and were
advised to catch fish during April-August rainy period when they were plentiful
and preserve them by drying and smoking for use in times of scarcity.
Those living on the highlands were expected to accommodate
neighbours displaced by floods in the lowlands, which were flood prone areas,
and so on.
In Swaziland, where drought and occasional floods are common
disasters, communities took precautions after predicting disasters. For
example, they used the height of the nests of the emahlokohloko bird (Ploceus
spp.) on trees to predict floods. When floods are likely to occur the nesting
of the emahlokohloko is very high up the trees next to a river and when floods
are unlikely the nests are low down. The Swazis also used the cry of certain
birds to predict rain and yields of certain wild fruit plants to predict
famine. Other indigenous methods used by the Swazis to predict natural hazards
include wind direction, the shape of the crescent moon and the behaviour of
certain animals (UNEP, 2008).
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