Analysing the influence of people and culture risk on risk management in the banking sector

Abstract

One of the main determinants for banks to overcome financial and reputational challenges is to manage operational risk to an acceptable level. Banks have been exposed to various operational risks, such as people risk and culture risk. Moreover, this has been exacerbated by employees' lack of positive perceptions about the importance of managing or mitigating people risk and culture risks within the banking sector. Therefore, analysing the influence of people risk and culture risk on risk management in the banking sector is crucial for banks to provide better risk strategies to enhance their employees' perception of operational risk and overall risk management. Operational risks such as people risk and culture risk have impacted other major risks in the banking sector, especially during the COVID-19 pandemic. The COVID-19 pandemic has impacted the banking landscape and changed the usual day-to-day operation of banks by adopting hybrid models that may have impacted culture, how employees used to work, more dependence on banking apps (less contact with people), and increased levels of risk. In South Africa, very few studies focus on people risk and culture risk in the banking sector. Therefore, a gap was found in conducting this research study. The main objective of this research study was to analyse the influence of people risk and culture risk on risk management in the banking sector. The literature review and empirical objectives of the research study were achieved by establishing quantitative research approaches in conjunction with a positivist research paradigm. This research study's target population consisted of South African banking sector employees. The sample frame included the top five South African commercial banks, namely ABSA, FNB, Nedbank, Capitec Bank, and Standard Bank. They were chosen based on market share, number of branches, and profit maximisation. The non-probability purposeful and snowball sampling methods were chosen for this research study as the best methods to gather large amounts of information from limited parameters effectively. Participants who met the inclusion criteria of being 18 years or older with matriculation as a minimum level of education and having more than six months of work experience in the banking sector were obtained as a representative sample. A sample size of 391 employees was considered satisfactory for quantitative data analysis. Quantitative data was collected using a self-administered online questionnaire and validated and pre-tested by seven researchers in the field of risk management. Various statistical analysis tools such as EFA, correlation coefficient, ANOVA, T-test, hypothesis testing, and SEM were used to model the influence of people and culture risk on risk management. The main contributions of the research study are based on the achievement of the empirical objectives and the creation of a model for how people and culture risk (as components of operational risk) influence risk management in the banking sector. For the first empirical objective, a significant difference was found in how individuals perceived risk management and operational risk. The demographic factors (age, ethnicity group, types of employment, and position or role held) were statistically significant, while gender (females) had a greater understanding of operational risk management. For the second empirical objective, it was found that there was a medium-positive linear relationship between operational risk management and risk management perception. Further, operational risk management and risk management perception positively correlated with people risk and culture risk during the COVID-19 pandemic. Lastly, the SEM demonstrated significant results that contributed to achieving the primary objectives. The SEM allows banks to predict factors that influence people risk and culture risk, which are likely to be the most valuable intangible assets of the bank. Consequently, this will help banks develop mitigation strategies and action plans to manage these operational risks. Managing any operational risk will allow banks to strive for more profit, competitive advantage, a better working environment, a strong reputation, an enabling culture, a better perception of risk, and ensure that risk is within acceptable risk appetite levels. Considering this research study's theoretical and empirical findings, limitations will always be part of any research study, as they are used to improve the current study. Future researchers can use this research study as a basis to improve the study by choosing a larger sample size and expanding the range of demographic factors. As this research study focused on people risk and culture risk as part of operational risk, future researchers may consider other types of risk such as reputational risk, market risk, credit risk, financial risk, information communication and technology risk and strategic risk with a focus on the banking sector.