The Role of Machine Learning in Enhancing Risk Management Strategies in Financial Institutions

Abstract

Purpose: The aim of the study was to examine the role of machine learning in enhancing risk management strategies in financial institutions. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study revealed that integration of machine learning into risk management strategies within financial institutions has demonstrated significant potential for enhancing decision-making processes and mitigating various risks. The study have consistently shown that machine learning algorithms outperform traditional statistical methods in areas such as credit risk assessment, fraud detection, market risk management, and loan portfolio optimization. These advancements have led to improved accuracy, efficiency, and timeliness in risk assessment, enabling financial institutions to make more informed decisions while reducing losses and enhancing overall performance. Unique Contribution to Theory, Practice and Policy: Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH) & Agency Theory may be used to anchor future studies on role of machine learning in enhancing risk management strategies in financial institutions. Invest in building robust data infrastructure and governance frameworks to support the implementation of machine learning models in risk management practices. High-quality data is crucial for training accurate and reliable machine learning algorithms. Establish regulatory guidelines and standards for the responsible use of machine learning in risk management within the financial industry. These guidelines should address issues such as model transparency, fairness, and accountability to ensure ethical and responsible practices.