Effect of Anti-money Laundering Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

Money laundering activities causes instabilities on the structure of financial institutions with the major effects being on legitimate businesses as their motive is not to maximize returns but to ‘clean’ the illegitimate wealth. Kenya as a country has put in significant efforts in addressing the phenomenon of money laundering through legislation to protect the integrity and reputation of its banking sector from the effects of criminal activities. The Country has had several amendments since the year 2009 to help improve the management of anti-money laundering risk. The objective of this study was to determine the effects of anti-money laundering risk management on financial performance of commercial banks in Kenya. This research adopted a descriptive design. The population of this study included all licensed commercial banks in Kenya as at December 2016. Data was collected for a period of twelve years spanning 2005 to 2016. In order to estimate the relationship between the dependent and independent variables, the study applied a multiple regression analysis. To ensure that the data collected is free from biasness, the study conducted a Mutlicollinearity tests. The study established a direct relationship between number of suspicious transactions and financial performance of commercial banks in Kenya (r=0.150, p=0.042<0.05). These findings however contradict regression analysis where an inverse relationship was established between number of suspicious transactions and financial performance of commercial banks in Kenya. There was an inverse relationship between AML implementation cost and financial performance of commercial banks (r=-0.305; p=0.035). The findings of the study indicated a strong positive relationship between interest rate and financial performance of commercial banks (r=0.510, p=0.090). This showed that an increase in interest rates enhances financial performance of commercial banks. On inflation, correlation analysis indicated a negative relationship between inflation and financial performance of commercial banks (r=-0.177, p=0.583). The study concludes that increase in number of suspicious transactions can either increase or decrease financial performance of commercial banks. There was an inverse relationship between AML implementation cost and financial performance of commercial banks indicating that as AML cost increase, financial performance declines. There is a positive relationship between interest rate and financial performance of commercial banks; an indication that increases in interest rates improves financial performance of commercial banks. The study recommends that management team of all commercial banks in Kenya should massively invest in technology for detecting and identifying suspicious transactions as that shall enhance their financial performance. The regulators need to financially support implementations of systems that manage risks in commercial banks operating Kenya. There should be a clear risk reporting framework that guides these financial institutions. The central bank of Kenya together with other regulatory bodies like the Capital Market Authority CMA should cooperate to establish proper monetary and fiscal policies to regulate the level of inflation and interest rates in the economy. Further research should be done on micro-finance institutions, money remittance providers as well forex bureaus due to their significant role in the financial sector so as to holistically and effectively combat Money laundering