The Influence of Financial Risk Management on the Financial Performance of Commercial Banks in Kenya

Abstract

Financial institutions are faced with critical challenges of finding new and better ways to increase top-line revenues, maintaining necessary capital ratios, improving margins, strengthening balance sheets and enhancing efficiencies within the organization. Commercial Banks therefore employ financial risk management practices whose objective is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, clear purpose and understanding so that it can be measured and mitigated. This study sought to assess the influence of financial risk management practices namely; Risk aggregation and Capital Allocation practices, Supervision and Regulation, Disclosures and Funded and Unfunded Credit protection on theFinancial Performance on Commercial Banks in Kenya.

The specific objectives were to determine the influence that these practices have had on the financial performance of commercial banks in Kenyaand to establish the relationship between Financial Risk Management and FinancialBank performance. This was a descriptive survey of commercial banks in Kenya. The credit and management staff of the forty two commercial banks and one mortgage company formed the target population with a sample size of one hundred and seven staff randomly chosen for the study. Primary data through close ended questions was collected in this study on the financial risk management practices employed and their influence on the financial performance of the commercial banks. Data was analyzed using correlation analysis and regression models with the strength of the model being tested using Cronbach's Co-efficient Alpha.

The study found that most commercial banks had highly adopted financial risk management practices to manage financial and credit risk and as a result the financial risk management practices mentioned herein have a positive correlation to the financial performance of commercial banks of Kenya. The study recommends that commercial banks should seek and obtain information consistently so as to permit them to detect potential problems at an early stage and identify trends not only for particular institutions, but also for the banking system as a whole, while also ensuring transparency of banking activities and the risks inherent in those activities, including credit risk.