Financial Risk Management and Financial Performance of Tier III Commercial Banks in Kenya
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Date
2025-12
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Kenyatta University
Abstract
Kenya commercial banks’ financial performance is influenced by myriad of challenges that can impact their profitability, operational efficiency and overall stability. Therefore, this review endeavored to ascertain financial risks impacts on Kenya’s commercial banks financial performance, specifically targeting operational, credit, liquidity and market risk impacts. Theories of Miller and Modigliani, financial distress, financial intermediation and modern portfolio underpined the review. Employing descriptive research, all 22 tier III banks formed the target populace and census was used. Financial data was collated from existing published statements using secondary designated collection sheet from 2019-2023. Data collected was analyzed via descriptive techniques (mean, median and standard deviation) and inferential statistics (multiple regression). Findings were organized and depicted clearly, using tables. Diagnostic assessments encompassed multi-collinearity, normality, heteroscedasticity, stationarity, Housman and autocorrelation. Ethical considerations was prioritized and observed at every step. The study revealed that operational, credit, liquidity and market risks had a positive significant effect on Tier III Kenya’s commercial banks’ financial performance. The research concludes that operational risks have the potential to result in operational failures, which may incur additional costs for mitigation and compliance, thereby placing financial strain on banks. The credit risk may occur in a situation whereby the bank does not effectively evaluate the borrower’s creditworthiness resulting to increased number of loan defaulters which also leads to more provisioning costs for bad debts affecting negatively the bank's profitability. The existence of liquidity risk can hinder a bank's ability to effectively manage its liquidity, leading to increased costs related to borrowed funds necessary to meet its obligations, which ultimately diminishes profit margins and impacts the bank's overall financial performance. Fluctuations in interest rates have an impact on the net interest income of banks, which constitutes their revenue stream. This can lead to a reduction in their ability to adapt to such changes, thereby influencing their financial performance. The research suggests that Tier III banks ought to improve their investment in technology by upgrading their information technology systems and implementing more advanced security protocols to reduce the risk of cyber threats. The Tier III banks should adopt a diversified loan portfolio to minimize more reliance of certain industries that could bring higher risks upon economic fluctuations. Tier III banks can properly manage liquidity risks through maintenance of a larger financing base like deposits, loans and other sources of capital mix. The Tier III banks should adopt a comprehensive structure managing risks, carry out a frequent stress test and have a more diversified lending portfolio to solve the possible losses.
Description
A Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, December 2025.
Supervisor
Dr. Salome Musau