The Influence of Risk Management on the Financial Performance of Tier 1 Commercial Banks in Kenya in Post Covid-19 Pandemic

Abstract

The COVID-19 pandemic has had a profound impact on the global economy, including the banking sector. In the aftermath of the pandemic, the financial performance of commercial banks has become a critical concern, particularly with regards to risk management. Tier 1 commercial banks recorded a decline in performance post Covid 19 compared to the pre-Covid 19 period. The profit before tax of Tier 1 commercial banks decreased by Ksh.46 billion in the year 2020 from Ksh.143 billion in the year 2019 to Ksh 97 in the year 2020. The objective of the research was to determine the influence of risk management on financial performance of Tier 1 commercial banks in Kenya in post Covid pandemic. The theoretical review focused on major theories that include Finance Distress theory, Risk Management theory and Organizational Performance theory. The method of descriptive research was employed in this study. The study through the researcher collected data in form of secondary data by use of data collection sheet. The secondary data was obtained from Bank Supervision Reports from the Central Bank of Kenya. The data collected was in a form of panel data from the 9 Tier 1 commercial banks in Kenya. The research covered a 5-year period from the year 2018 to the year 2022 from which data was derived. The analysis of this data was conducted using SPSS version 27 and STATA. It was concluded that credit risk management had a positive effect on financial performance of commercial banks in Kenya since it helps in identifying and mitigating high-risk borrowers and loans. It was concluded that liquidity risk management had a positive effect on financial performance of commercial banks in Kenya as adequate liquidity management ensures that an organization has the funds to cover its short-term liabilities. It was concluded that operating risk management had a positive effect on financial performance of commercial banks in Kenya. This is because investors and customers are more likely to bank with financial institutions with effective operating risk management strategies in place. Asset quality had a positive effect on financial performance of commercial banks in Kenya. This is because when loans and investments are of high quality, the bank's interest income is more secure, and the need for provisions and write-offs due to non-performing assets (NPAs) is reduced, leading to improved net earnings. It was recommended that commercial banks should diligently oversee the credit reports of their customers to ensure that they extend credit to individuals with a strong creditworthiness, thereby minimizing the likelihood of loan defaults. The research suggests that commercial banks should strike a balance in retaining an optimal level of liquidity, ensuring they avoid customer-induced panic withdrawals while simultaneously providing sufficient credit to customers to boost their interest income. The banks must establish effective internal controls and protocols to minimize instances of fund mismanagement, forgery, check fraud, hacking, and the acquisition of unauthorized information, all of which can have detrimental effects on the banks' performance. Commercial banks should consider diversification of Loan Portfolio so as to avoid overconcentration of loans in a single sector or industry.