The effect of operational risk management practices on the financial performance in Commercial banks in Tanzania

Abstract

A stable financial sector helps promote and strengthen economic growth by mobilizing resources for investment. It also provides a frame work for undertaking monetary policy. The banking sector is very important in any economy, considering its basic function of which is to relocate funds from agents with surplus to those with deficit .The purpose of this study was to establish the effect of operational risk on the financial performance of commercial banks in Tanzania. The total population consisted of all 36 commercial banks in Tanzania as at 31st December 2013. Since the population of the study was small there was no need for sampling hence the whole population was used for the study. The study was used secondary data which was readily available from the Bank of Tanzania and the all the commercial banks hence a census study. The study adopted a descriptive survey of the commercial banks in Tanzania. Secondary data was collected from financial reports of commercial banks in Tanzania from 2009 to 2013.Regression analysis was conducted in order to establish the effect of Operational risk management on financial performance of commercial banks in Tanzania. These variables included the Credit risk, the Insolvency risk and the Operations efficiency usually provided by the Bank of Tanzania. The dependent variable of the study was the financial performance of the commercial banks in Tanzania and this was measured using the return on assets as a percentage. The findings from the study confirmed that the independent variables such as such as Credit risk, Insolvency risk and Operation efficiency had varying degrees of relationship with the financial performance of the commercial banks in Tanzania. The study also revealed that Operations risk management positively influenced returns of the commercial banks in Tanzania. This study also established that Operations efficiency were positively correlated with the financial performance of the commercial banks in Tanzania while the Credit risk and Insolvency risk rate negatively influenced the financial performance of commercial banks Tanzania. This study therefore recommended that the Commercial banks should handle their risk factors appropriately as the changes in the risk factors like operational risk bring about devaluation of the currency and affect the performance of the commercial banks listed in the DSE.