Effect of financial risk management on financial performance of state-owned commercial banks in Kenya

Abstract

The link between financial risk management and thedegree which Kenyan government owned bankuing entities performned in monetary terms was explorted in this investigation. The adopted design was descriptive survey with focus on 6 firms. The raw statistics was obtained from auxiliary sources covering a time frame as from 2010 all through to 2019. The processing of the gathered views was descriptively and inferentially done. It was shown that on controlling for firm size, foreign exchange risk had the largest negative but insignificant effect on financial performance followed by liquidity risk that also had a negative but significant effect and lastly interest rate risk that had a positive but insignificant effect on financial performance. The study concluded that financial risk management had mixed relationship with financial performance. The study recommended that risk managers of the government owned commercial banks in Kenya should adopt hedging, currency swaps, future contracts and forward contracts among other strategies so as to minimize their exposure on financial risks. The relatively larger government owned commercial banks in Kenya should leverage on their strong liquidity position to support the relatively smaller and struggling banks like Development Bank of Kenya and the Consolidated Bank. The credit managers and analysts of the government owned commercial banks should be careful when evaluating the credit worthiness of the customers so as to reduce on credit risk exposure. The policy makers including the National Parliament should expedite on the proposed merger of the struggling government owned commercial banks like Consolidated Bank and Development Bank to establish one larger institution that would command a relatively larger market share. The Central Bank of Kenya should regulate the fluctuation in interest rates as this would signify interest rate risk that may have an influence on financial performance of the government owned commercial banks in Kenya. The study was limited by a relatively smaller sample size that may affect how the findings of the study are generalized and thus a limitation. Future studies should also focus on other financial institutions like Microfinance Institutions or deposit taking Savings and Credit Cooperatives or simply the listed commercial banks or the foreign owned commercial banks.