Financial Risk Management Practices and Financial Performance of Tier One Commercial Banks in Kenya
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Date
2025-11
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Kenyatta University
Abstract
The economic landscape and the financial infrastructure in Kenya is predominantly controlled by financial institutions such as commercial banks. These include the banks classified as Tier 1 banks. However, their financial performance has raised concerns due to the inherent risks involved. In 2021, there was a 6.7 percent increase in doubtful loans and a 13.0 percent increase in loss loans and advances. Continuing into 2022, the doubtful loans category saw a 13.6 percent increase, while the loss loans and advances category experienced a 13.5 percent increase. This study mainly delved into establishing the influence of risk management practices on the financial performance of banks in the Tier 1 category. The specific objectives included; the influence of market, liquidity, credit risk and operating risk management on performance of Tier 1 banks in Kenya. Theories used included; financial distress, risk management and organizational performance theory. Both descriptive and explanatory research designs were utilized. Study’s population comprised 9 Tier 1 banks in Kenya. A census of all the nine Tier 1 commercial Banks was conducted since the target population was not large. Secondary data in form of the bank’s annual financial reports was compiled using a collection sheet. The data source was the Kenya’s Central Bank’s Supervision Reports in five-year duration, starting 2018 to 2022. Moreover, descriptive and inferential statistical analysis was carried out. Descriptive statistics included mean and standard deviation whereas inferential statistics consisted of Pearson correlation analysis and multiple regression models. The diagnostic tests included Hausman, multi-collinearity, normality, heteroscedasticity and autocorrelation tests. The study findings indicated that unit increase in liquidity risk management resulted in an increase in ROA of the Tier 1 banks. The result further indicates a positive though insignificant correlation between liquidity risk management and performance. In regard to the influence of credit risk management on financial performance, the results indicated a positive and significant relationship between credit risk management and performance. In regard to the influence of operating risk management on performance, findings revealed that a unit rise in operating risk management results in growth in ROA of the Tier 1 banks. The results additionally indicate an affirmative and substantial connection between operating risk management and performance. In regard to the influence of market risk management on performance, the results indicated that a rise in market risk management causes a rise in ROA of the Tier 1 banks. Moreover, the results indicate a positive and significant relationship between operating risk management. However, the results noted that all the financial ratios for all the banks under study were volatile, showing upwards and downward trends. The study recommends that fluctuations in liquidity ratios reported over the five year period have to be addressed by maintaining a balanced portfolio of liquid assets and increase total liquid assets relative to short-term liabilities. Furthermore the entities under study should adopt lending in line with the estimated risks of each borrower through credit score rating. In order to better manage the liquidity of the banks under study the entities under study should augment the total liquid assets relative to short-term liabilities. There is a need to implement key risk indicators that will help to identify and respond to changing risk in order to address the operational risks. In regard to the market risk management, the banks should instigate of tight internal controls aimed at combating fraud, forgery and hacking which results in poor banks’ performance. In order to address the volatility observed in all the financial ratios, it recommended that the Tier one Banks need to devise strategies that will increase pre-tax profit and reduce the amount of non-performing loans in order to stabilize the financial ratios.
Description
A Research Project Submitted to the School of Business, Economics & Tourism in Partial Fulfilment of the Requirements for the Award of Master of Business Administration (Finance) Kenyatta University, November 2025.
Supervisor
1. Rosemary James