Effect Of Financial Risk Exposure On Financial Performance Of Commercial Banks In Kenya

Abstract

Risk exposure management is very crucial to any business in the industry that is trying to thrive given the current economic conditions. The banking sector is not left behind as it is constantly faced with a number of unavoidable risks that are not limited to borrowers defaulting on loans. Market forces for example change in interest rate and foreign exchange rate also pose as a threat to these institutions. The general objective of this study was to establish the effect of financial risk exposure on the financial performance of commercial banks in Kenya. The specific objectives were: to assess the effect of credit risk, liquidity risk and market risk exposure on financial performance of commercial banks in Kenya. This study was anchored on Risk Management Theory. Other theories included contingency theory and shift ability theory of liquidity which informed the study variables. The target population of the study was the entire population of 42 commercial banks in Kenya. Secondary data was obtained from annual supervision reports from the Central Bank of Kenya and financial statements from the respective commercial banks. The data was analyzed using descriptive and inferential statistics. The study conducted normality, multicollinearity, autocorrelation and heteroscedasticity diagnostic tests. A panel data model was used to empirically test the effect of financial risk exposure on financial performance of commercial banks in Kenya. The three null hypotheses developed in chapter one of the study were rejected at 5% level of significance. Findings revealed that financial risk exposure had a positive significant effect on financial performance of commercial banks in Kenya. Credit risk exposure had a positive significant effect on the financial performance of commercial banks in Kenya; market risk had a positive significant effect on financial performance of commercial banks in Kenya; while liquidity risk exposure had a negative significant effect on financial performance of commercial banks in Kenya. The study recommended the need for commercial banks to set up risk management strategies that minimize their exposure to various risks by setting provision for loan loss through adoption of the Loan Loss Provision by all commercial banks in order to mitigate from credit risk exposure; by having efficient risk management practices to ensure that commercial banks are able to minimize the effect of certain risks that they face; by ensuring that shareholder goal of wealth maximization is met, by attaining consistent profits that are distributed to them in the form of dividends. Finally, the study recommended that all business entities should practice risk management strategies in order to boost their performance either in a financial or operational perspective. Moreover, an establishment of comprehensive risk management of commercial banks should be made a prerequisite as it contributes to the overall risk management systems. The greatest contribution to the body of knowledge is that for a sound financial survival of commercial banks in Kenya, keen attention needs to be directed towards credit risk exposure, liquidity risk exposure and market risk exposure. Failure of which would sink commercial banks into liquidity, credit and market risks. To regulators and policy makers, the study will form the basis of the control policy framework to alleviate financial risks associated with commercial banks in Kenya and across the world.