Risk Management Effect On Profitability Of Commercial Banks: Evidence From Kenyan Commercial Banks

Abstract

The study aimed at establishing whether risk management in Kenyan commercial banks affects the profitability of those banks. The study also strived to find out whether management of various risks had the same effect on the bank’s profitability. In this study, we used financial information from financial reports of all Kenyan banks covering the years 2014 to 2018. The researcher computed various ratios from these financial statements and checked whether banks’ profitability was impacted by risk management. Multiple regression analysis revealed that credit risk and profitability were negatively and insignificantly related (β =-0.0288653p=0.084). The test between interest risk and profitability indicated a significant and positive relationship (β =0.3086844, p=0.0001). In addition, it was revealed that foreign exchange risk influences the profitability of Kenyan banks positively and insignificantly (β =0.0405662, p=0.0954). Further, the findings showed a strongly inverse relationship between liquidity risk and profitability (β =-0.0575109, p=0.001). There was a positive and significant relationship (β =0.0980943, p=0.0070) between capital management risk and profitability. The test between bank deposits and profitability revealed a negative and significant relationship between the variables (β =-0.0739159, p=0.0090). In addition, the results show a significantly positive relationship between bank size and profitability (β =0.0045187, p=0.0480). Finally, the panel regression revealed a significantly positive relationship between operational risk and profitability (β =0. 0.0579156, p=0.00460). The study concluded that proper risk management is necessary for the profitability of banks in Kenya. Therefore, it is recommended that the managements of banks in Kenya invest in risk management to enhance profitability. The study also recommended that bank management properly manages its liquidity levels because it has adverse effects to the profitability of banks.