The Effect of Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

As a result of the rising volatility of money markets, financial inventions, and the expanding importance of financial instruments associated with financial intermediation, risk management is becoming an essential subject in the banking sector. Risk management frequently leads to improved financial performance since risk management and risk control allow a company to save money. The effect of risk management on financial performance Kenya’s commercial banks was the study objective. The technique of descriptive research was applied for the research. The secondary data sources in form of annual Bank Supervision Report aided in the collection of secondary data which covered a 5-year duration from 2016 to 2020. SPSS version 27 and STATA helped in data analyses and the outcomes were given in form of tables, regressions, correlations, ANOVA and T-test. The study concluded that there was a positive relationship between financial performance and liquidity risk management though the relationship was weak and insignificant. Credit risk management had a positive relationship with financial performance though it was weak and insignificant. Operating risk management had a positive relationship with financial performance though it was insignificant. Equity risk management had a positive relationship with financial performance of commercial banks which was significant. Bank size had a positive relationship with financial performance of commercial banks which was significant. The study recommends that commercial banks should maintain the right amount of liquidity so that they don’t suffer from panic withdraws by the customers but at the same time ensure that they advance enough credit to their customers to increase their interest income. Commercial banks should keenly monitor their customers’ credit reports so that they advance credit to credit worthiness customers. Commercial banks should come up with proper internal controls and procedures to reduce cases of banks’ fund, forgery, cheque fraud, hacking and acquiring unauthorized information. The banks should invest in research and development as well as in relevant innovations so that they can increase their equity. The bank should invest in emerging technologies and e-marketing so that they can increase their size at lower costs in terms of customer numbers and the numbers of branches.