The Effect of Risk Management on Financial Performance of Commercial Banks in Kenya

Abstract

Risk management is relevant for managers in planning and executing different functions. Recognizing risk management as part of managerial functions results to many advantages and including risk management in organizational planning enhances organizations’ value. This study’s aim was to determine the effect of risk management on the financial performance of commercial banks in kenya. 39 commercial banks formed the survey’s population. Roa parameterized financial performance, board size and bank size were control variables, credit risk and liquidity risk indicated risk management. Collection of data was from 2018 to 2022 by aid of a data sheet. This research utilized descriptive research design with aid of stata software. Regression analysis outcome from the survey revealed that, r square was 0.159, which translates to 15.9% of variability in financial performance due to four indicators the researcher selected. This implies that factors not in the model explained 84.1% in variability. The p value was 0.000, which is below 0.05 significance level, which confirms that the overall model was significant implying goodness fit. Meaning the model was ideal. Further analysis revealed varied outcome from the survey. Results revealed that liquidity risk has a negative association with financial performance and the association is significant (β=0.013, p=0.042). Credit risk revealed a negative and significant association with roa (β=0.283, p=0.000). Board size revealed a positive and significant association with financial performance (β=0.126, p=0.004). Bank size revealed a positive association with financial performance (β=0.138, p=0.067). Study recommends development of a robust framework for liquidity risk management. Study further recommends commercial banks to have contingency plans to shield the banks against significant default rates.