The effect of risk management on financial performance of commercial banks in Kenya

Abstract

Risk management is accepted as a major cornerstone of bank management by academics, practitioners and regulators. Financial institutions are bestowed with an imperative responsibility to execute in the economy by acting as intermediaries between the surplus and deficit units, making their job as mediators of critical significance for efficient allocation of resources in the modern economy (El-Hawary et al., 2007). The objective of the study was to determine the effect of risk management on financial performance of commercial banks in Kenya. Descriptive research design was used in this study. Secondary Data was collected from Central Bank and banks financial reports and multiple regression analysis used in the data analysis. From the findings the study found that there was a strong positive relationship between risk management and financial performance of commercial banks in Kenya. The study also found that there was a negative relationship between credit risk, insolvency risk, interest rate sensitivity and financial performance of commercial banks. The study also revealed that there was a positive relationship between capital adequacy, size of the banks, operational efficiency and financial performance of commercial banks. The study recommends that there is need for the commercial banks to effectively manage their risk as it was found that risk management positively influence financial performance of commercial banks. The study further recommends that there is need for the management of commercial banks to constantly check their banks’ exposure to edit risk, insolvency risk, and interest rate sensitivity. There is need for the commercial banks to enhance their capital adequacy and operational efficiency with respect to their size .