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

Abstract

In a world that always shows signs of change and with each change coming up with various ways of doing business to achieve results, risk administration and the ways adopted to oversee those identified risks is a basic issue to the company. The late global monetary crisis served as an update that risk management and how the same is honed is very key if executional goals are to be reliably accomplished. Results have shown that entrepreneur’s owners and administrators try through all means to sustain execution and now they are compelled to consider the risk management procedures and practices that their companies have embraced to abstain from missing the mark regarding their vital targets. This is significantly more so in the budgetary administrations division which was the most influenced amid the late money related emergency. The main core objectives of this study were to analyze the risk management practices embraced by Kenyan Commercial Banks and to evaluate the impact of these risk management practices on their profitability of the Kenyan banks. The risks management practices adopted by financial institutions are fundamentally classified into; Risks management environment, risks monitoring, risk measurement, internal controls, capital adequacy and investment guidelines and strategic guidelines. The risks management practices where studied by use of a questionnaire and linked to the commercial banks financial performance which was measured by use of ROE. The main objective was to determine the effect of these risk management practices to the financial performance of the commercial banks. With a specific goal to carry out this study, the researcher obtained primary data through an organized survey. This survey was done using a structured questionnaire that was conveyed out to the 42 Commercial Banks in the nation. Equally, secondary data was obtained from the specific banks websites and published financial results. Both sets of data were analyzed using the SPSS tool and a multiple regression equation was established. From the research it was concluded that risk management practices under study significantly affected the financial performance of commercial banks with an exception of capital adequacy and risk monitoring which had a negative effect.