The assessment of the impact of risk management in reducimg the risks of financial institutions in Cameroon

4.2.3 RELATIONSHIP BETWEEN CREDIT RISKS AND PROFIT: THE CASE OF AFRILAND FIRST BANK

As seen above the calculations were made for the period 2003 to 2004. The following table summarizes the relationship between default risk and profit.

Table 4.5: A Summary of the Relationship between Credit Risk and Profit

Years Variables	31/12/2004	31/12/2003	Changes
Credit Risks (% of bad loans)	13.5 %	14.5 %	- 1 %
Profit Made (Profit Margin ) % of Loans	Fcfa 2, 077, 377 (2.5 %)	Fcfa 1, 735, 133 (2.48 %)	+ 342, 114 + 0.02 %

Source: Afriland Financial statements and calculations, appendix2.

Going by the table above, we can see that since credit risks are minimised, more profits are made on loans thus a 1 % reduction in credit risk has led to an increase in profit of 342, 114 Fcfa. This therefore helps s in rejecting H_{0 :} there is no relationship between the risk management and profitability of financial institutions in Cameroon and accept the H_1.

4.2.4 INVESTIGATING THE IMPACT OF RISK MANAGEMENT ON THE LIQUIDITY POSITION OF FINANCIAL INSTITUTIONS IN CAMEROON

In order to make this investigation possible, we are going to rely on data given in Appendix 1, relating to the financial ratios of SOWEFCU, and its financial statements.

For us to compile the liquidity risks of SOWEFCU, we need to assess the deviations between the liquidity ratios for various years in order to determine the degree if liquidity risks.

The liquidity risk is therefore quantified as:

? (X - u) ²

S or ó = v N

Where:

u = Mean of 3 years liquidity ratio

X =The actual amount of liquidity ratio

N = Number of years

143 + 100 + 110
3

Thus; u =

= 117.67

This will be the adequate liquidity level; the deviations from this level will represent the risks of illiquidity.

(143 - 117,67)²

3

ó 96/97 = v = 14.7

(100 - 117,67)²

3

ó 97/98 = v = 10.2

(110 - 117,67)²

3

ó 98/99 = v = 4.43

furthermore, the operating income increased from Fcfa (4 millions) in 1996/1997 to Fcfa 1 million in 98/99, with a spike Fcfa 2 million in 1997/1998, yielding a rate of return that ranged from -17% to 4% and profitability rates from 13% to 21%.

Once more we can see that from years 96/97 till 98/99 the risks are reducing from 14.7 to 4.43 and the corresponding results are the increase in Returns On Equity (ROE) from -17% to 4% and profitability margin rates from 13% to 21%.

The following table can therefore be drawn;

Table 4.6: Relationship Between Liquidity Risks, Profitability and Return On Equity: The Case of SOWEFCU

Years variables	96/97	97/98	98/99
Liquidity risk (ó)	14.7	10.2	4.43
Return On Equity ROE	-17	13	4
Profitability Rates (net incomes/sales)%	13	21	/

Source: SOWEFCU Financial Statements and Calculations, 1999

When the risk management of SOWEFCU succeeded in reducing the liquidity risks, the correspondent results were an increase in profitability rates and Return on Equity thereby confirming the H₁: there is a relationship between risk Management and the growth of Financial Institutions in Cameroon, while rejecting the H₀.