A survey of operational risks management practices by commercial banks in Kenya

Abstract

Risk has been generally defined as the volatility of unexpected outcomes. Finns are exposed to various types of risks which can be broadly classified into business and non business risks. Operational risk is·-the risk of loss- resultin-g-rrom inadequate or failed- internal pl~ocesses, people and systems or extemal events. The study had the objective of identifying the types of operational risks faced by commercial banks in Kenya as well as to identify operational risks management practices by commercial banks in Kenya. The study findings reveal that the main _types of operational risks experienced by most of the commercial banks in Kenya are human risks, process risks and external risks. It was noted that the main causes of operational risks were identified as frauds by outsiders, frauds by . . employees, corporate culture and the organizational structure. Most of the banks that have operational risks management departments have these departments to investigate cases of frauds that have already taken place and not necessarily to manage the operational risks. All the banks that responded to the questionnaire suffered losses through frauds and thefts between 200 I and 20m. From. the study it is evident that majority of the commercial banks have clearly defined strategies, structure in place and an audit driven operational risk approach. Many banks base their process on the IT systems in place. It was noted that most banks regularly review new processes with a view to rectifying any loop holes. The study found that many banks do not consider some of their stakeholders when implementing their projects. Tools used by commercial banks in the measurement of operational risks include the control and risks assessment technique, risk indicator and escalation triggers, risk and process mapping and the impact score card. Some techniques like the loss scenario model and capital allocation model used by commercial banks and other financial institutions in the developed countries in quantifying risks have not yet been implemented in Kenya mainly because of the level of technological advancement and products offered by bankin the developing countries. Notably many banks use insurance to hedge against risks.