Effects of Risk Management on Financial Performance of Banks in Kenya 2016 - 2020

Abstract

This study assessed effects of risk management on financial performance of banks in Kenya from 2016 to 2020 study period. The study was guided by four specific objectives. These were to: analyze effect of operational risk on financial performance of banks Kenya, assess effects of credit risk on financial performance of banks Kenya, determine effect of market risk on financial performance of banks Kenya, and determine effects of liquidity risk on financial performance of banks Kenya. The Modern Portfolio, Transaction Cost, Liquidity Preference theories were adopted for this study. A census of all 39 commercial banks was adopted using their financial statements and CBK annual supervision reports to retrieve data. The data was analysed using mean, standard deviation, correlation coefficients, and multiple linear regressions. The data was presented in tables and supported by interpretation and followed discussion of the findings. Operational risk had the greatest negative effect on financial performance of commercial banks followed by credit risk, market risk, and lastly liquidity risk. This implies that an increase in each of these variables resulted in a decrease in commercial banks’ performance during the study period. The study therefore recommends for banks to be more vigilant in identifying and meeting supervisory and regulatory requirements from the Central Bank of Kenya by enhancing training in their risk management departments and also ensure that they are insured to protect the institution from operational risks. Commercial banks are also advised to design attractive loan products for their consumers to promote more borrowing such as offering low interest rates to the majority of those who can afford certain loan limits.