Effect of Financial Risks on the Financial Performance of Commercial Banks in Kenya

Abstract

Commercial banks are indispensable in economic stability of a country. The commercial banks thrive but with great financial risks that are resolved through sound financial management. It drives the business towards holistic growth. Though the financial risk exposes the commercial banks to great predicaments, it exposes firms to opportunities that generate higher return. Therefore, the objective was to examine the effect of financial risk on the financial performance of commercial banks in Kenya. The predictor variables were; credit risk, operating risk, liquidity risk as well as the interest rate risk. The study optimized descriptive was a master plan aiding explanation of cause and effect correlation. This research considered the 38 commercial banks listed by CBK as at 31st December, 2021 for period 2017-2021. Moreover, the data was generated from secondary means. This means the information was generated from published and audited financial reports. The assessment utilized SPSS to analyze and to generate multiple linear regression. In addition, the study used descriptive statistics to elaborate the findings. The outcome postulated standard of 0.0275270 for the financial performance. The standard deviation was for risk linked to credit, operational, liquidity, and interest rate were 2.5124016, 0.2626974, 0.2208429, and 0.1607076 respectively hence explaining the variability. The findings of diagnostic computation under multicollinearity accentuated that the four predictor variables in the assessment study did not have association among themselves. The Durbin Watson value recorded from mathematical quantification was 1.504 posting the normal range. Additionally, the output on normality test was also good for the study. The correlation computation portrays the connection among various variables. Credit, liquidity and interest rate risks posted positive correlation towards the financial performance while operating risk posted a negative correlation. Further, R of 0.694 and R-Square of 0.482 illustrated that regressor accounted for 48.2% variation on the financial performance. The other factors not cited in this assessment amounted to 51.8%. Moreover, analysis on confidence level was done. The F-Statistic resulted in 2.997 with the significance level of 0.000. The threshold stipulated a figure below 0.005 for the statistic to stand the test. The findings of P=0.000˂0.05. Simply means, when all factors are held constant, the financial performance is positive 0.022 hence defining business was still generating returns. Furthermore, an addition of one unit of credit risk causes positive increment in the financial performance by 2.2%. Nonetheless, an increase in single unit of operating risk translates to decrement in the financial performance by 4.6% if other variables remain unchanged. Further, the advancement of single unit of liquidity risk changes the financial performance by positive value of 0.6% whenever other influencers are held constant. Finally, a unitary advancement of interest rate risk causes positive adjustment in the financial performance by 5.2% only whenever other enablers are stagnated to remain unchanged. The study concluded by advocating for more assessment on effect of digital-risk on the financial performance.