Relationship between financial risk management and financial performance of commercial banks in Kenya

Abstract

Financial risk is inherent in every commercial bank, but commercial banks that embed the right financial risk management strategies into business planning and financial performance management are more likely to achieve their strategic and operational objectives. This study sought to fill the existing research gap by answering the following research question, does there exist a relationship between financial risk management and financial performance of commercial banks in Kenya? The study adopted descriptive research design. Secondary Data was collected from the Central Bank of Kenya and Commercial Banks in Kenya and multiple regression analysis used in the data analysis. The study had sought to establish the relationship between financial risk management and financial performance of commercial banks in Kenya. The study revealed that there was there was a negative relationship between credit risk, interest rate risk, foreign exchange risk, liquidity risk and financial performance of commercial banks in Kenya. The study also revealed that there was a positive relationship between capital management risk, bank deposits, bank size and financial performance of commercial banks in Kenya. The study recommends there is need for the management of commercial bank to control their credit risk, through non-performing loan level as it was revealed that credit risk negatively affects the financial performance of commercial banks in Kenya. There is need for the management of commercial banks in Kenya to maintain the liquidity level at safe level as it was found that liquidity risk negatively affect the financial performance of commercial banks in Kenya. The management of commercial banks in Kenya should hedge against foreign exchange risk and interest rate risk as it was found that interest rate risk and foreign exchange negatively affects the financial performance of commercial bank in Kenya. The study recommends that there is need for commercial banks in Kenya to increase their size, capital risk management and also their bank deposits