Financial Risks and Financial Performance of Commercial Banks in Kenya
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Date
2023
Authors
Mwania, Richard Jones
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Commercial banks in Kenya frequently record unpredictable financial performance, with some being placed under statutory receivership by the central bank of Kenya due to their inability to meet their stakeholder commitments. Although commercial banks constantly use thorough risk management procedures, the banking industry nonetheless suffers losses. These results from the banking industry's exposure to risks related to liquidity, credit, interest rates, and foreign exchange rates. The purpose of this research was, thus, to assess the impact of credit, interest rate, and foreign currency rate risks on financial performance of Kenyan commercial banks. The research study examined how financial risks affect commercial banks' performance in Kenya. The study was founded on agency theory, maturity gap analysis theory, purchasing power parity theory and liquidity preference theory. This study employed a causal analysis approach. The participants in this study comprised all of the 39 commercial banks operating in Kenya between 2017 and 2021. The data collecting sheet was used to compile the secondary data. The study adhered to ethical considerations to the later. STATA was used to analyze the data using a panel regression model at a 95% level of significance. Tests for multicollinearity, heteroscedasticity, and normality as well as the Hausman test were established. Descriptive statistics such as mean, standard deviation and both the minimum and maximum were used to present the data. From the data analyzed, R-square for the regression was 0.7308 depicting that the four financial risks jointly account to 73.08 percent of the variation in financial performance of banks. The study established that while credit risk had a significant negative impact on commercial banks' performance, liquidity risk had a significant positive benefit with beta coefficients of -0.6795 and 0.2079 respectively. Furthermore, exchange risk improved commercial banks' bottom lines with a beta coefficient of 0.9125; however, this benefit was not statistically significant. Finally, interest rate risk with a beta coefficient of -0.1137 impacted commercial banks' bottom lines negatively but not statistically significantly. The research study recommended that commercial banks management should consider credit worthiness of their customers, put in place strict processes to edge out loan defaulters and should be careful when granting loans to new customers. To support failing banks, the study also recommended that the government and the Central Bank of Kenya should increase the minimum liquidity ratio required by law. The central bank should closely monitor the liquidity ratios of commercial banks to give warning to banks struggling in meeting the minimum statutory requirement.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirement for the Award of Degree of Masters in Business Administration (Finance Option) of Kenyatta University, April, 2023.
Keywords
Financial Risks, Financial Performance, Commercial Banks, Kenya