Financial Risk Management and Profitability of Local Private Commercial Banks in Kenya
Bwibo, Anne Mabel
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Commercial banks are responsible for providing financial services thus form part of the backbone of an economy. While providing the financial service, they are exposed to various financial risks. Risks have adverse cost elements associated with them thus ultimately affect financial performance of institutions. In 2017, as a result of interest rate volatility, Family bank and Standard chartered issued profit warnings a sign of poor performance. During the period 2015-2017, three commercial banks in Kenya i.e. Dubai bank, Chase bank as well as Imperial bank were put under receivership owing to liquidity and capital deficiency challenges among other reasons which exposed financial risk to depositors, creditors as well as the banking sector; hence, the study analysed Financial Risk Management (FRM) and Profitability of Local Private Commercial Banks’ in Kenya. Specifically, the research determined effect of CRM, LRM, IR Risk Management and also FOREX Risk Management on Local Private Kenyan Commercial banks’ profitability. The theories underpinning the study were Modern Portfolio Theory, Managerial Efficiency Theory and Agency Theory. Moreover, descriptive research approach was deployed during the research. The study targeted 20 local private commercial banks operating as at 2021 in Kenya. Banks selection was conducted using the census design. Primary data was gathered using questionnaires. Purposive sampling was adopted to select respondents. Data was analysed using descriptive statistics and multiple regression analysis. The study found that CRM has a significant positive effect on profitability; LRM has a significant positive effect on profitability; IR risk management has significant positive effect on profitability and foreign exchange rate risk management has a significant positive effect on local private commercial banks’ profitability in Kenya. This indicates that improvement in CRM (credit limits, credit insurance and loan appraisals) improves the banks’ profitability. Improvement in LRM (loan to total deposit ratio, liquid coverage ratio and net stability funding ratio) improves profitability of the local private commercial banks in Kenya, enhancement in interest rate risk management (IR limits and interest on loans) increases local private commercial banks’ profitability and improvement in foreign exchange risk management (cross currency swaps and price adjustment) improves local private commercial banks’ profitability. Hence, the study recommends that local private commercial banks ought to set up maximum credit limits for the borrowers, obtain credit insurance policy and examine the market value of the collaterals used in order to lower default rate on the loan hence improve the banks’ profitability. Moreover, local private commercial banks should charge common percentage of interest rate on all loans offered in order to attract many borrowers who would like to take different types of loans to cater for the diverse needs hence increasing the banks’ profitability. Additionally, the local private commercial banks ought to use cross currency swaps to exchange funding in one currency for funding in another currency as well as hedge investments in foreign currency bonds. The study recommends that further studies ought to be carried out to examine the effect of FRM on profitability of the foreign owned banks and entire banking sector in Kenya. In addition, more studies need to be conducted to assess other factors influencing banks management.
- MST-Commerce