Effect of Financial Risk Management on Performance of Commercial State Corporations in Kenya

Abstract

n the dynamic landscape of corporate finance, managing financial risks is of paramount importance for organizations seeking to achieve sustainable growth and profitability. This study addressed the critical need to understand the relationship between financial risk management practice and the financial performance of commercial state corporations in Kenya. These entities play a pivotal role in the Kenyan economy, making kit imperative to assess the effectiveness of their risk management strategies. The study aims to shed light on the impact of credit risk management, liquidity risk management,operational risk management, and firm size on financial performance, measured by Return on Assets (ROA). The study utilized modern portfolio theory, agency theory, and stakeholder theory. This study employed a descriptive panel research approach. The target population consisted of 54 commercial state corporations in Kenya. Secondary data spanning a 5-year period (2018 to 2022) was collected annually. The research utilized correlation analysis to explore initial associations and multiple regression analysis to ascertain the impact of risk management practices and firm size on financial performance. The regression results revealed an R Square value of 0.371, indicating that approximately 37.1% of the variance in ROA could be explained by the chosen independent variables. Specifically, credit risk management exhibited a statistically significant negative effect on financial performance (β = -0.100, p = 0.044), indicating that improved credit risk management practices were associated with higher ROA. Conversely, liquidity risk management had a positive and significant impact on financial performance (β = 0.580, p = 0.000), suggesting that better liquidity risk management, reflected in a higher current ratio, led to improved ROA. However, operational risk management did not demonstrate a statistically significant influence on financial performance in this context (β = 0.019, p = 0.701). Firm size also did not exhibit a significant relationship with the financial performance, with a coefficient of 0.041 (p=0.405). In conclusion, this study underscores the importance of credit risk management and liquidity risk management as key drivers of financial performance in commercial state corporations in Kenya. Effective risk management practices, particularly in credit and liquidity risk, have the potential to enhance financial stability and profitability. Policymakers and organization leaders should prioritize robust credit risk assessment and mitigation strategies. The study also recommends the need for organizations to maintain an optimal balance between current assets and liabilities to ensure financial stability.