Financial Risks and Financial Performance of Commercial Banks Listed In Nairobi Securities Exchange, Kenya
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Date
2025-04
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Kenyatta University
Abstract
Commercial banks serve an essential part in any economy by allocating resources from depositors to investors. In performance of this role the banking sector has experienced major transition because of the volatile environment it operates in leading to collapse of many banks. The performance of banks is influenced by several variables, including the diverse kinds of risks they are exposed to. Despite the implementation of comprehensive risk management systems by commercial banks, the banking sector nevertheless incurs financial losses. Commercial banks listed on the NSE are experiencing declining financial performance. The main objective of the study is to ascertain the effect of financial risk on the financial performance of commercial banks NPAs: Non-Performing Asset NSE: Nairobi securities Exchange NPLR: Non-performing loans Ratio NSFR: Net Stable Funding Ratio PMI: Project Management Institute NIST: National Institute of Science and Technology ROA: Return on Asset ROE: Return on Equity SACCOs: Saving and Credits Cooperative Societies xiv listed on the Nairobi Securities Exchange in Kenya and will be measured by return on equity. Further the study seeks to examine the effects of credit, operational and liquidity risks on the financial performance of commercial banks listed on the NSE, Kenya. This study is based on Merton's Default Risk Model, Agency Theory, Shiftability Liquidity Model, and Risk Management Theory. Explanatory research design was used for study. A census was done on the 11 listed commercial banks with focus being from the year 2018 to 2023. The data collecting sheet was employed to amass the secondary data. The variables were analysed using IBM SPSS Version 25. Tests for multicollinearity, heteroscedasticity, normality, correlation, regression as well as the Hausman test were established. Data was diplayed in tables. From the findings, the study concluded that credit risk has a significant negative influence on financial performance of listed commercial banks. Operational risk has a significant positive influence while liquidity risk has significant positive influence on financial performance of listed commercial banks. To mitigate credit risk,continuous monitoring and evaluation of credit portfolios is recommended. This ensures timely identification and mitigation of potential risks. Banks should engage in scenario planning to anticipate and prepare for potential operational disruptions. This involves simulating various scenarios to test the resilience of operational systems and implementing measures to address identified weaknesses. Listed banks should diversify their funding sources to reduce reliance on short-term funding and promote the development of longer-term funding instruments in the financial markets. All ethical considerations were observed during the study.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree in Masters of Business Administration (Finance Option) of Kenyatta University, April 2025.
Supervisor
Charity Njoka