Risk Management Strategies and Performance of Commercial Banks in Kenya

Abstract

Modern day organizations are exposed to more risk than they were in the past. This is mainly due to emerging trends including technology advancement increasing the firm’s culpability to threats such as cybercrime, identity theft and phishing. Escalating risks have also been largely due to intensified competition which has made firms venture into new lines of businesses without conducting due diligence. Firms in the financial sector are more exposed to risk than companies in other sectors because of desire for quick riches by current day generation which have little experience in management of funds and register a high default rate. The implications of lack of proper risk management in the financial sector have some huge repercussions on the economy and can result to bank crisis, eventual collapse and economic recession. It is on this premise that the investigation sought to examine the effect of risk management strategies on performance of Kenyan commercial banks. The study was informed by two theories namely the modern portfolio theory and the prospects theory. Data collection was performed using self-administered questionnaires. A response of 35 questionnaires were returned yielding a response of 83 per cent. The regression analysis findings revealed a statistically significant effect of risk management strategies performance of commercial banks as shown by significance level of 0.000 which is <0.05. This affirms that the model was a reliable estimator of bank performance. The coefficient of determination (R2) 0.502 value implied that 50.2 % of performance of commercial banks is attributed to risk management strategies namely risk acceptance, risk transfer, risk reduction and risk avoidance. A unit change in risk acceptance was found to cause 0.326 positive and significant change in performance of commercial banks. Similarly, a unit change in risk avoidance triggered a 0.447 positive and significant change in performance of commercial banks. On the other hand, a unit variation in risk transfer initiated a 0.523 positive and significant change in bank performancewhile a unit change in risk reduction caused a 0.665 positive and significant variation in bank performance. Part of the recommendations include the need for need for the regulators such as the central bank and other banking bodies such as the Kenya bankers association to develop frameworks for risk management to facilitate collaborative effort in the management of banking risks since a breakdown in the banking system have ripple effects on the entire economy and the need to attention to global and local financial markets to timely observe trends and shocks and set up safeguards to avoid hazardous repercussions.