The Effects of Financial Fraud and Liquidity on Financial Performance of Commercial Banks in Kenya

Abstract

Bank fraud in Kenya has increased and will continue to increase because it is a part of everyday life. According to data from the Banking Fraud Investigations Department (BFID), Kenyan banks lost KSh1.5 billion (approximately US$17.64 million) over the last year, with only a third being recovered by investigators. Several cases are pending in court or are still under investigation. The objective of this study was to evaluate the effects of financial fraud and liquidity on the financial performance of the commercial banks in Kenya. This research study adopted a descriptive research design. Regression analysis model was used in which the dependent variable was the ROA. The independent variables were the annual liquidity ratios and the annual fraud loss. The multiple regression analysis was used to determine how each of the dependent variable relates to ROA. The result showed that banks’ financial performance variable Return on Assets (ROA) has significantly affected by liquidity ratios and fraud loss with positive correlation. The strong and positive Pearson correlation coefficients imply that financial fraud loss and liquidity ratios had a strong and significant influence of financial performance of commercial banks in Kenya for the period considered. The study recommends that commercial banks in Kenya should put in place fraud detection mechanisms by setting up an efficient, reliable and working fraud detection department to oversee all the transactions that are considered prone to fraud to minimize the vice for them to maximize profits for better financial performance.