4.2 QUANTITATIVE ANALYSIS
In this section, we are going to make use pf practical
analytical tools such as ratio analysis and standard deviations analysis for
the period of past incomes and expenses. Since standard deviation will help us
to estimate the degree of risks, we will compare the evolution of these degrees
to the ratios of return on equity (ROE) and return on investment in order to
monitor the changes in risk level. For this to be feasible, we will make use of
two case studies in Cameroon which are SOWEFCU (south West Farmers Cooperative
Credit Union) with headquarters located in Kumba and Afriland First Bank which
is a commercial Bank operating in Douala and Yaoundé with several
branches in other provinces of Cameroon and all over Central Africa. The
information provided by these financial institutions will be provided in
appendixes.
4.2.1 INVESTIGATING THE IMPACT OF RISK MANAGEMENT ON THE
PROFITABILITY OF FINANCIAL INSTITUTIONS.
In this section of our study, we are going to rely on the case
of Afriland first Bank, which gives information in Appendix 2.
We all know that Banks make their profits on interests from
loans and advances granted. The profit margin will therefore be computed as the
amount of profit per amount of loans.
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Profit + P/L brought forward
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Net total Amount of Loans
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Profit Margin = X 100
The data computed by using Appendix 2 give the following
results:
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31/12/2004
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31/12/2003
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Profitability margin =
2, 061,664 + 15,73384, 008, 693
X100
=2.5%
PM = 2.5 %
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Profitability margin =
1, 727,147 + 8,086 68, 773, 187
X 100
= 2.48 %
PM = 2.48 %
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Table 4.3: Computation of Profitability Margin
Source: Afriland Financial statement and calculations,
2004
By the end of the year 2004, more loans are given out and the
corresponding profits were 2, 077, 377 whereas by the end of year 2003 the
profits are (1, 727, 147 + 8, 086) = 1, 733, 233 Fcfa, which is less than in
year 2004. The explanation of this increase in profitability is that risks
management applies an adequate credit risk policy since more loans are repaid
by debtors and this will enhance profits. We can further investigate the impact
of risk management on credit risk and establish a relationship with the
profitability level, all of this applied to the same case study which is
Afiland First Bank.
4.2.2 ASSESSING THE IMPACT OF RISK MANAGEMENT ON THE
OVERALL CREDIT RISK POLICY OF FINANCIAL INSTITUTIONS.
In our analysis, we are going to use provisions as the amount
of bad loans, since they represent amount kept by the enterprise in order to
overcome defaults payments.
The following can therefore stands for credit risks:
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Provisions (loans)
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amount of Total loans
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Credit Risks =
X 100
(% of bad loans)
Using data in Appendix 2, we have got the following
results:
Table 4.4: Computation of Credit risk
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31/12/2004
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31/12/2003
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Credit Risk:
13, 110, 61597, 119, 308
CR = X 100
= 13.5 %
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Credit Risk:
11, 632, 69580, 405, 883
CR = X 100
= 14.5 %
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Source: Afriland Financial Statements and calculations,
2004. Appendix 2
At the end of year 2003, the credit risk was evaluated at
14.5 % of the total amount of loans. This percentage has reduce by 1 % by the
end of year 2004, thus decreasing to 13.5 % of the total amount of Loans. Now
let's have a look at the effect of this risky-shift on the profitability of the
Afriland First bank.
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