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RISK MANAGEMENT AND PERFORMANCE OF MULTINATIONAL COMPANIES IN KAMPALA, UGANDA

ABSTRACT

This study focused on Risk management and performance of multi-national companies in Uganda, a case study of Barclays Bank, Uganda. The study objectives were to find out common risks multi-national companies like Barclays Bank face, to establish the relationship between risk management and performance of multi-national companies like Barclays Bank and to establish the impact of risk on performance of companies.

The study adopted a cross sectional research design, it was quantitative in approach. The study population was, a sample of 160 respondents were used purposively and randomly selected to participate in the study. Questionnaire was used for data collection.

Basing on the results of study findings, the researcher recommends that; since the Bank is mostly affected by liquidity, interest rate and exchange rate risks, the management should to manage (control) other risk because liquidity risk is mainly the result of other risks and that multi-national companies like Barclays Bank should constantly carry out risk monitoring so as to identify any new risks that may affect the operation of the Bank.

The researcher suggests that further studies should be carried out on the effect of financial risk management on financial appraisal.

Based on the study findings, the study concluded that multi-national companies like Barclays Bank are mainly affected by liquidity risk and that operational risk and financial risk management enables companies to define their objectives for the future and to perform better forecasts.

All the respondents agreed that operational risk like failure of internal controls affects multi-national companies like Barclays Bank because of inadequate or failed internal processes or people’s mismanagement which leads to losses Majority of the respondents agreed that risk monitoring minimizes exposure of multi-national companies like Barclays Bank to market risk and credit risk, this is because risk monitoring check whether the risk identification, evaluation and assessment have been successful. All the respondents agreed that financial risk management enables the Bank to perform better forecasts.

CHAPTER ONE

Introduction

This chapter introduces the different risks managed by organizations and assessment of risk management procedures in Uganda drawing experiences and literature from other countries and examples in Ugandan context. The section gives a back ground to the problems faced in the process, a statement of the problem and purpose of study.

1.1 Back ground of study

Risk management is an activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Some traditional risk managements are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death).

According to Nassaver Frank and Pausenberger etherified, Risk is an event that results into loss of money and causes availabilities in business cash. The risk management have affected the performance of small and medium businesses it leads to the collapse.

Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Objective of risk management is to reduce different risks related to a pre-selected domain to an acceptable. It may refer to numerous types of threats caused by environment, technology, humans, organizations and politics. This describes the different steps in the risk management process which methods are used in the different steps, and provides some examples for risk and safety management. Risk is unavoidable and present in every human situation. It is present in daily lives, public and private sector organizations. Depending on the context (insurance, stakeholder, technical causes), there are many accepted definitions of risk in use.

The common concept in all definitions is uncertainty of outcomes. Where they differ is in how they characterize outcomes. Some describe risk as having only adverse consequences, while others are neutral.

One description of risk is the following: risk refers to the uncertainty that surrounds future events and outcomes. It is the expression of the likelihood and impact of an event with the potential to influence the achievement of an organization’s objectives.

The phrase “the expression of the likelihood and impact of an event” implies that, as a minimum, some form of quantitative or qualitative analysis is required for making decisions concerning major risks or threats to the achievement of an organization’s objectives. For each risk, two calculations are required: its likelihood or probability; and the extent of the impact or consequences.

It is recognized that for some organizations, risk management is applied to issues predetermined to result in adverse or unwanted consequences. For these organizations, the definition of risk which refers to risk as “a function of the probability (chance, likelihood) of an adverse or unwanted event, and the severity or magnitude of the consequences of that event” will be more relevant to their particular public decision-making contexts.

When an entity makes an investment decision, it exposes itself to a number of financial risks. The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc. According to Dannie tice and Catherine conneron 2000, Performance is the going process that involves managing the criteria for which an institution agency or project can be held accountable.

Risk management is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recessi Zon that began in 2008 was largely caused by the loose credit risk management of financial firms.

So, in order to minimize and control the exposure of investment to such risks, fund managers and investors practice risk management. Not giving due importance to risk management while making investment decisions might wreak havoc on investment in times of financial turmoil in an economy. Different levels of risk come attached with different categories of asset classes.
For example, a fixed deposit is considered a less risky investment. On the other hand, investment in equity is considered a risky venture. While practicing risk management, equity investors and fund managers tend to diversify their portfolio so as to minimize the exposure to risk.

NC State’s ERM Initiative, in partnership with the American Institute of CPAs, has just released its Report on the Current State of Enterprise Risk Management: Opportunities to Strengthen Integration with Strategy. Based on survey responses from 446 business executives spanning a number of industries, types and sizes of organizations, the report provides detailed insights about the state of maturity about a number of processes related to their organization’s current state of enterprise risk management (ERM). This is the fifth year that we have conducted similar research in partnership with the AICPA.

Despite the fact that over 55% of the respondents believe that the volume and complexity of risks has increased “mostly” or “extensively” in the past five years and that in over 60% of the organizations the board of directors is asking “somewhat”, “mostly” or “extensively” for increased senior executive involvement in risk oversight, only 20% of them describe the level of their organization’s risk management as “mature” or “robust.” In 2009, we found that only 8.8% of organizations we surveyed claimed to have complete ERM processes in place; by 2013, 24.6% made that claim. However, the fact that only a quarter of organizations surveyed have complete ERM processes in place suggests that there continues to be significant room for risk oversight improvement across most entities. Not surprising, the largest organizations and public companies are much further along, with 55.8% and 52.0% of those organizations, respectively, claiming to have complete ERM processes in place. In contrast, just 13.0% of not-for-profit organizations made that claim.

In recent years, the tougher regulatory environment and fast-evolving risk landscape are profoundly changing the way an organization manages its risks. The board of directors and senior executives are under increasing pressure from various stakeholders to maintain effective oversight of risk management. At the same time, there’s been a rising interest in risk management as a competitive advantage both in decision-making (tackling the risk the organization wants or needs to take and planning accordingly) and event response (crises management, business continuity, etc.). Such heightened attention may have driven an increase in organizations’ risk management spend.

In the survey, nearly one third of respondents have indicated a marginal or significant planned increase in risk management spend/resources over the next 12 months. Respondents in the Middle East and Africa, and Asia Pacific regions say they are planning to spend more, due to their rising awareness of risk management and risk transfer.

Following years of declining risk management budgets we see this as a very positive trend.

Only three percent of respondents say they are planning a decrease in risk management spend. Risk management is, at present, implemented in many large as well as small and medium sized industries.

In (Gustavsson 2006) it is outlined how a large company can handle its risks in practice and contains a computer based method for risk analysis that can generate basic data for decision-making in the present context. In that study, Trelleborg AB has been chosen as an example to illustrate the difficulties that can be encountered concerning risk management in a large company with different business areas. One typical difficulty is reaching the personnel. Another typical weakness is a missing system for controlling and following up on the results of the risk analysis that has been performed. The multinational companies from which research is to be carried out are in Kampala district, Uganda.

1.2 Problem statement

Only handfuls of companies are not anxious about their risks. There are a number of areas that can be exposed to risks yet can be targeted to prevent the risks from occurrence.

Typically, companies focus on short-term, risk reducing measures to alleviate this problem, but this is a naïve strategy and typically just creates a down ward spiral effect, which becomes harder and harder to stop. A more intelligent approach is to use combinational strategy to identify areas in which implementation of a management-based strategy will stimulate increased performance.

As a result of increasing competition and due to rapid changes in technology, multinational companies are one of the companies which require risk management in order reduce the losses caused by risks. Recently in Somalia, this sector is one of the sectors which of recent has engaged in risk management and yet most multinational companies do not reach the expected performance. This study intends to investigate why risk management has been introduced in multinational and yet companies are not performing expectedly (Bowen, 2009).

1.3 Purpose of the study

The purpose of this study determined the relationship between risk management and performance of multinational companies in Kampala, Uganda.

1.4 Research objectives

1.4.1 General objectives

To correlate the risk management and performance of multinational companies like Barclays Bank in Kampala, Uganda.

1.4.2 Specific objectives

The specific objectives of the study were as follows:

To assess different risks managed by multinational companies like Barclays Bank in Kampala, Uganda.
To assess the criteria or methods used in risk management by multinational companies like Barclays Bank.

To determine the relationship between risk management and performance of multinational companies like Barclays Bank in Kampala, Uganda.

1.5 Research Questions

What risks are managed by multinational companies like Barclays Bank in Kampala, Uganda?

What are the characteristics of the respondents of Barclays Bank in terms of age, gender, level of education and marital status?

What are the criteria or methods of risk management on performance of multinational companies like Barclays Bank?

To what extent do risk management techniques have effect on the performance?

1.6 Scope of the study

The study explored how risk management had an effect on performance.

The study was carried out on Multinational Companies a case study of Barclays Bank in Kampala, Uganda and basically involved the Company’s staff, managerial staff, and Human resource office respectively.

The study of risk management and performance was conducted in July 2016 and covers a historical period that ranges from 2016.

The study is based on F. B. Hawley offered his “risk theory of profit” in 1893. According to Hawley, risk in business arose from product obsolescence, a sudden fall in prices, superior substitutes, natural calamities or scarcity of certain crucial materials.

The researcher’s study yielded data and information that was useful for understanding, the effect of risk management on the firm’s performance in multinational firms like Barclays Bank. The findings and recommendations of this study are useful for risk managers. They cannot not rely on hard personnel experience in carrying out management of risks, but make their decisions on concrete knowledge of understanding their risk management to the performance of their respective firms. This helps to improve their financial performances.

The research was to benefit by other researchers to get a basis for further research on impact of risk management on performance of multinational firms like Barclays Bank. This led to the idea for better understanding of risk management and performance.

1.7 Operation of key terms

Risk: A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through pre-emptive action.

Management: The organization and coordination of the activities of a business in order to achieve defined objectives.

Risk management: The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks.

Performance: This is the level at which organizations are achieving their set goals like profitability. Performance is the primary goal of all business ventures. Without performance the business cannot survive in the long run. So measuring current and past performance and projecting future performance is very important.