Operational Risk Strategy and Performance of Commercial Banks in Kenya

Abstract

The running of organisations across the world is an involving endeavour given the need to outcompete rivals, the high resource requirements and the dynamic nature of the operational environments. One of the most critical aspects of the dynamism of the operational environment is the level of operational risk. In an ideal scenario, commercial banks would be able to effectively integrate operational risk strategy that ensure enhanced stability of operations during turbulent times while catering to the needs of all external and internal stakeholders, thus meeting the need for improved performance. Whilst operational risk strategy is a critical requirement for commercial banks during these uncertain times, it is made even harder when the attainment of good performance is also sought by these organisations. This is because sustainable banking practices require compromises to be made by toning down on the profit maximisation objective in order to address environmental, social and economic concerns of others outside the organisation. This study, therefore, sought to confirm how the identified operational risk strategy and performance of commercial banks interlink. The study was supported by the Financial Intermediation Theory and the Contingency Theory. The study applied descriptive research as it was seeking to explain the traits of the study participants. The target population of the study was 38 commercial banks in Kenya from which 38 senior managers were interviewed. This study then used SPSS (version 28) to conduct descriptive data analysis described using measures of central tendency, standard deviation and Inferential statistics described using Pearson Correlation coefficients analysis and regression analysis. The research findings revealed that operational risk avoidance, operational risk transfer and operational risk monitoring were all critical strategies for enhancing the performance of commercial banks. However, operational risk acceptance was found to lack a statistically inferable relationship with performance. The study recommended that banks need to benchmark with those institutions that have successfully integrated components of operational efficiency. A number of the banks do not have existing strategic risk management and recovery plans in all their units neither have they appointed risk management team so more resources should be expended in the establishment of strategic risk management and recovery plans across the breadth of all the commercial banks.