Financial Risks and Financial Performance of Commercial Banks Listed in Nairobi Securities Exchange, Kenya
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Date
2024-11
Authors
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Publisher
International Academic Journal of Economics and Finance (IAJEF)
Abstract
Despite the implementation of comprehensive
risk management systems by commercial
banks, the banking sector incurs financial
losses. Commercial banks listed on the
Nairobi Security Exchange are experiencing
declining financial performance. Financial
risk management is regarded as a metric for
assessing the performance or failure of a
financial organization. It has been neglected
in recent a long time. The main objective of
the study is to ascertain the effect of financial
risk on the financial performance of
commercial banks listed on the Nairobi
Securities Exchange in Kenya and will be
measured by return on equity. This study was
based on Merton's Default Risk Model,
Agency Theory, Shiftability Liquidity Model,
and Risk Management Theory. Explanatory
research design was used for study. The
sample is 11 listed commercial banks being
focused from the year 2018 to 2023. The data
collecting sheet was employed to amass the
secondary data. The ethical considerations
were observed to. The variables were
analysed using IBM SPSS Version 25. Tests
for multicollinearity, heteroscedasticity,
correlation, regression as well as the Hausman
test were established. The findings on credit
risk indicated that the mean Non-Performing
Loans Ratio is 11.062% which show
moderate negative correlation between credit
risk and financial performance of listed bank
at (r=0.324; p=0.0016). Operational risk
results indicated a strong positive and
significant association between operational
risk and financial performance(r=0.758 and
p=0.00168) while liquidity risk showed that
the mean of loan to deposit ratio is 72.847%
and a weak positive correlation relationship
between liquidity risk and financial
performance (that r=0.0652 and
p=0.003).From the finding the study conclude
that credit risk, operational risk and liquidity
risk has significant influence on financial
performance of listed commercial banks. The
study recommends that banks should engage
in continuous monitoring of credit portfolios,
invest in capacity building for enhanced risk
management capabilities. Banks should
conduct regular comprehensive risk
assessments, invest substantially in
technology for robust IT systems, and engage
in scenario planning to anticipate and address
potential operational risks. In addition, the
listed banks should diversify funding sources,
employ advanced risk modelling for robust
liquidity risk management
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Citation
Malalu, M. S., Njoka, C. (2024). Financial risks and financial performance of commercial banks listed in Nairobi Securities Exchange, Kenya. International Academic Journal of Economics and Finance, 4(3), 369-390