Effect of Information Technology Risk on Financial Performance of Commercial Banks in Kenya

Abstract

The lending by commercial banks has a vital role in spurring the development of an economy. The existence of the commercial banks in any economy, thus, is inevitable since they affect almost all sectors of the economy. Consider the analogy that at the heart of every commercial bank is a technology company. The various activities relating to, financial services in banks are facilitated by technology and more importantly are the huge portions of capital investments and operational expenses that technology consumes. Commercial banks and how they perform financially depends on the reliability and security of its technology. A commercial bank and its customers can be sent into a frenzy when reports of a system downtime are announced. The changing technology landscape, especially the upsurge in information technology risk over the digital era, calls for banks to make strategic decisions on the technology to adopt. For example, weak controls allow a bank to be susceptible to processing errors or even unauthorized transactions. The study sought to establish the effect of information technology risk on Kenyan commercial banks performance in financial perspective. The study used descriptive statistic design and a population of 42 commercial banks registered and licensed by CBK were used as sources of data for analysis within a period of 5 years. The study focused on primary from the questionnaires as well as secondary data obtained from the banks’ published financial statements from 2013 to 2017. The summary of the collected data was compiled by use of descriptive statistics that include the standard deviation and mean and were consequently analysed by use of the regression analysis and correlation techniques. From the findings, the study made the conclusion that strategic risk of IT, IT resiliency and continuity risk and technology vendor and third-party risk significantly and negatively affects performance of Kenyan commercial banks in financial perspective. The study further concluded that the banks are positively but insignificantly affected by cyber security and incidence response risk. The study recommends that Kenyan commercial banks should adopt IT risk management framework with policies that are aligned to their strategic objectives in order to mitigate the increasing IT risk in the banking industry.