Financial Risk Management and Deposit Money Banks’ Performance in Nigeria - Theoretical Review

Sep 4, 2026

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This paper presents a comprehensive theoretical review of the relationship between financial risk management and the performance of Deposit Money Banks (DMBs) in Nigeria. It draws on Risk Theory, Agency Theory, Modern Portfolio Theory, Contingency Theory, Enterprise Risk Management (ERM) Theory, and performance-oriented perspectives such as the Theory of the Firm and the Efficiency Structure Hypothesis. The review links financial risk multidimensionality—credit, market, liquidity, operational, and interest rate risks—to outcomes including profitability, stability, and operational efficiency. It emphasizes the roles of corporate governance, strategic risk-taking, and adaptive regulatory compliance, concluding with recommendations for future empirical validation and localized research.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages19

Reading Time48 min

AccessFree to download

Abstract

Introduction

Financial sector role and bank performance relevance

Risk exposure and the need for financial risk management

Regulatory developments in Nigeria

Review objective and scope

VOLUME 1 | Issue-8 | JUNE 2025 [E.mail:editor@ijfams.com|](E.mail:editor@ijfams.com|) [https//:www.ijfams.com](https//:www.ijfams.com) Financial Risk Management and Deposit Money Banks’ Performance in Nigeria: A Theoretical Review. Eseosa Tina ESECHIE Department of Finance, Faculty of Management Sciences, University of Benin, Benin City, Nigeria. [eseosa.esechie@uniben.edu](eseosa.esechie@uniben.edu) +2348139096896 ABSTRACT This paper presents a comprehensive theoretical review of the relationship between financial risk management and the performance of Deposit Money Banks (DMBs) in Nigeria. Drawing from diverse yet interconnected theoretical frameworks including Risk Theory, Agency Theory, Modern Portfolio Theory, Contingency Theory, Enterprise Risk Management (ERM) Theory, and several performance-oriented theories such as the Theory of the Firm and the Efficiency Structure Hypothesis—the study explores how risk management practices influence banking outcomes such as profitability, stability, and operational efficiency. The review highlights the multidimensional nature of financial risk, including credit, market, liquidity, operational, and interest rate risks, and examines how theoretical insights inform mitigation strategies within regulated environments. It also underscores the importance of efficient corporate governance, strategic risk-taking, and adaptive regulatory compliance in enhancing bank performance. The study contributes to the academic literature by synthesizing classical and modern theories to provide a contextualized understanding of risk management practices in Nigerian banks. It concludes by recommending future empirical validation of the theoretical models and encouraging more localized research that incorporates behavioral and institutional factors affecting risk management in emerging economies. Keywords: Financial Risk Management, Bank Performance, Deposit Money Banks, Risk Theory, Enterprise Risk Management, Nigeria, Agency Theory, Efficiency Structure Hypothesis. [308](308 @ IJFAMS | Available online @ www.ijfams.com | Volume)[ @ IJFAMS | Available online @ www.ijfams.com | Volume](308 @ IJFAMS | Available online @ www.ijfams.com | Volume) 1 | Issue 8| JUNE, 2025 | 1. Introduction The financial sector is integral to the growth, stability, and development of any modern economy, with banks playing a central role beyond merely safeguarding deposits. They facilitate the mobilization of savings, efficient allocation of capital, payment processing, and risk management. In Nigeria, deposit money banks (DMBs) hold particular significance as they maintain the bulk of public deposits and function as primary intermediaries that channel funds from savers to borrowers. This intermediary role places DMBs at the core of the Nigerian financial system, influencing monetary policy implementation, credit distribution, and liquidity management. Their ability to sustain trust and confidence in the financial system is therefore critical. Banking, however, is inherently exposed to a variety of risks, including credit, liquidity, operational, and market risks, among others. These risks can have significant adverse effects on a bank’s financial health and, if not properly managed, may pose threats to the broader economy (Muriithi&Muigai, 2017; Bavoso, 2022) . Effective financial risk management (FRM) has thus become indispensable. FRM involves the systematic identification, assessment, and mitigation of potential financial threats, ensuring institutional stability and resilience (Nwude&Okeke, 2018) . As banks diversify their operations and portfolios, the complexity and interconnection of risks have increased (Mohammed &Knapkova, 2016; Harb et al., 2022) . Past crises, notably the global financial meltdown of 2007–2009, have underscored the severe consequences of inadequate risk management practices (Coskun, 2012) . Recent developments further highlight these concerns. In early 2023, the collapse o

FAQs

What is the central relationship examined in the paper?

The paper reviews the theoretical relationship between financial risk management practices and the performance of Deposit Money Banks (DMBs) in Nigeria.

Which types of financial risk are discussed?

It highlights credit, market, liquidity, operational, and interest rate risks as key multidimensional components of financial risk.

How does the paper connect risk management to bank performance outcomes?

It explains that risk management influences profitability, stability, and operational efficiency, supported by multiple theoretical frameworks and governance/regulatory considerations.

Sep 4, 2026

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