EFFECTS OF FINANCIAL RISK ON PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Abstract
The ability to mitigate risk and meet shareholder and stakeholder demands is a key ingredient in the success of any commercial bank hence enterprise risk management has been widely researched for years. Nevertheless, a few number of studies have been carried out in developing countries like Kenya. Of key consequence has been the inconsistent performance of most commercial banks in Kenya in the market, a factor that has adversely contributed to receivership due to their inability to meet shareholders and stakeholder’s demands. This study aimed at determining the effects of financial risks on performance of commercial banks in Kenya. In particular, this study aimed at determining the impact of liquidity risks on return of assets (ROAs) of commercial banks in the country. Questionnaires were also used to source for data. Internal consistency checks of data were performed using Cronbach’s alpha to check for the reliability of data. Financial performance on commercial banks was assessed on terms of return on assets. The study uncovered that liquidity risks have a positive and significant effect on performance of the commercial banks. The study concluded that the banks involved in the study had well managed their liquidity and that bank earnings were positively influenced by higher interest rates. This study recommended that commercial banks should have a proper methodology for the measurement, identification, and control of financial risks. It is important that all banking ventures have a comprehensive risk mitigation process embedded within their operations and that this is subjected to appropriate board and upper management oversight. Commercial banks should also know the risk appetite of its key stakeholders such as directors and gauge appropriate responses to them. This study also recommended that all banks should explore more methods to enhance interest rate risks management capacities. Finally yet importantly, this study recommended the use of Forward exchange contracts as they provide businesses with a cushion from the adverse shifts in exchange rates by fixing an exchange rate until a much later date.
Key Words: Liquidity Risks, Interest Rate Risks, Foreign Exchange Risks
CITATION: Okeyo, R. R., & Miroga, J. (2020). Effects of financial risk on performance of commercial banks in Kenya. The Strategic Journal of Business & Change Management, 7 (4), 1026 – 1036.
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DOI: http://dx.doi.org/10.61426/sjbcm.v7i4.1840
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