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

Abstract

Previous research studies have been conducted on fraud risk assessment, strategic responses to fraud risks and on fraud investigative and detective frameworks to enhance mitigation measures to curb fraud losses that have an effect on financial performance of commercial banks. However, little information has been published on effect of fraud management strategies on financial performance of the commercial banks. In other studies, aspects of fraud risk assessment have been shown to be powerful proactive tools in fight against banking frauds. This supports the hypothesis of mitigation measures instituted in forms of fraud risk management strategies correlate positively with the financial performance of the commercial banks. This study assesses the effect of fraud risk management strategies on financial performance of commercial banks in Kenya. This study adopted a descriptive research design and the target population of this study was all commercial banks in Kenya. According to CBK there are 43 commercial banks in 2013, 39 commercial banks responded to this research study which is a 88.6% response rate. The study used primary data and secondary data sources. The data collected was coded and analyzed using the Microsoft Excel and SPSS. Inferential analysis was done using inferential statistics. This study is tested by a regression model to examine the effects of fraud risks management strategies on the financial performance of commercial banks in Kenya. This involved the regression of three independent variables with the financial performance of commercial banks. The independent variables include Technology Adoption, Governance and Regulation. The regression is performed against performance measure of Return on Assets (ROA) which is the key dependent variable for this study. The result shows that there is a positive and statistically significant effect of fraud risk management strategies on the financial performance of commercial banks in Kenya. Regulatory, governance and technology adoption are positively correlated with financial performance and 77.6% of variation or change in financial performance as measured by ROA is explained by fraud risk management strategies instituted by the commercial banks. The findings implicate that commercial banks fraud detection and prevention units should adopt fraud management strategies to reduce financial fraud losses to enhance growth in financial performance so as to maximize the bank value.