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

2.4 THE CONCEPT OF RISK

2.4.1 THE NATURE OF RISKS

For S.R.Diacon (1988). Risks are present whenever human beings are unable to control or perfectly foresee the future. For example, risk of theft, firing, natural disaster. Similarly, there are risks in running a business, because no business man can guarantee that he will make profits rather than losses. But although we cannot measure the risks we can to some extend measure it the term uncertainty is used where future alternatives and hence are not known, such as in speculative ventures like the outcome of space research or of possible new inventions.

2.4.2 TYPES OF RISKS

Fundamental and particular risks

Fundamental risks affects either society in general or of people and cannot be controlled (in partially by any one person where as particular risks refers to those future out come that we can control partially (though not predictably) (S.R.Diacon, 1988).

Pure and speculative risks

Speculation risks are present if either beneficial or adverse outcomes could stem from a specific event whereas if possible harm is the only alternative to the present status quo, the situation is known as pure risk (S.R. Diacon, 1988).

Uninsurable risks

In practise, not all risks can be insured. The insurability of risks depends on number of factors which are:

- measurable in money terms

- pure risks only

- a large number of independent exposures

- Fortuitous losses or accidental losses. (S.R. Diacon and L. Carter, 1988.)

2.4.3. EVALUATING RISKS

Measuring risks is difficult, and even experts are not agreed on exactly how it should be done. Several tools of analysis exist but the most used ones are:

Profitability distributions

Probability in the chance of occurrence of a particular event over a total range on number of event its mathematical formula is:

Pr = B/Ù; where B is the outcome of one event and Ù is the total possible outcomes.

The standard deviation technique

It is symbolised by and it is found by adding the squared of the deviation by the individual values from the mean of the distribution.

The mathematical formula is

? (X - u) ²

S or ó = v N

Where X is the actual variable, u is the mean of all the variables and N is the total of all the variables.

2.4.4. FORMS OF RISKS ENOUNTERED IN THE FINANCIAL MILIEU

Since financial institutions deals in the money market, they have to be liquid at any point in time in order to cover their debt in the short term. The following are risks that the financial institution can face.

2.4.4.1 LIQUIDITY RISKS

Also called bankruptcy risks, it is the risks that a firm will be unable to repay depositors therefore leading to insolvency or default ( www.specialinvestors.com).

2.4.4.2. CREDIT RISKS

This is the most common type of risk faced by financial institutions in the money market. It is the risk that an issuer of debt securities or a borrower may default on his obligations or that the payment of the interest or the principal or both may not be made on a negotiable instrument ( www.specialinvestors.com).

2.4.4.3. INFLATION OR PRICE RISKS

This is the risk that arises when the values of a portfolio (security) will decline in the future or a type of mortgage pipeline risk created in the product segment when loans terms are set for the borrower in advance of terms being set for secondary market sale. If general level of rate rises during the product cycle, lender may have to sell his original loan at discount and this could lead to a loss ( www.specialinvestors.com) specialised financial dictionary online.

These three forms of risk will be the central importance in our study, although not all forms have been highlighted in this study.