Operational Risk and Financial Stability of Commercial Banks in Kenya

Abstract

commercial banks that have undergone mergers and acquisitions demonstrating their financial stability concerns include Spire Bank, National Bank of Kenya, as well as Kingdom Bank and Access Bank. The other banks that are facing concerns with regard to the financial stability in Kenya include the Consolidated Bank and the Development Bank of Kenya among others. Thus, the nexus between operational risk and financial stability of Kenyan commercial banks was the main focus of the study. The study adopted correlational research design targeting 39 Kenyan commercial banks and census was embraced. Information was obtained from auxiliary sources over the five year period of 2017-2021. The analysis was done through Statistical Package for Social sciences guided by means and standard deviations, correlation and regression analysis and presented through tables. The study observed that operational risk (r=-0.503, β=0.058, t>1.96 & p<0.05) is a significant predictor of financial stability of commercial banks in Kenya when Bank size (r=0.328, β=0.055, t>1.96 & p<0.05) and liquidity (r=-0.118, β=0.011, t>1.96 & p<0.05) are controlled. The study conclude that operational risk is negatively but significantly linked with financial stability of commercial banks. It was recommended that finance managers working in commercial banks in Kenya should put in place adequate mechanisms to enhance the liquidity position while cutting down on operational costs and expenses. It is important to have in place revenue maximization efforts and mechanisms among commercial banks in Kenya so as to maximize the operating income.