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

Abstract

Financial risk management is considered by researchers as a yard stick for determining failure or success of a financial institution. It has not been given much attention in recent times. This research work sought to bring to light the need for financial institutions to pay attention to the management of risk. It is obvious that the aim of every business is to maximize shareholders wealth and acquire substantial profit either for expansion or to undertake new product development. Across the banking industry, the most prominent area that erodes the mass of their profit is risk management (credit, market and operational). The objective of this study was to analyse the effect of financial risk management on the financial performance of commercial banks in Kenya. The study analyzed the current financial risk management practices of the 44 commercial banks licensed in Kenya. The researcher adopted descriptive research design and ROA which represents financial performance was averaged for 6 years (2008-2013). The study was based mainly on secondary data which was collected from the annual reports of commercial banks. The researcher in her analysis used multiple regression analysis models which were presented in the form of tables and regression equation. The findings of the study showed that there is a significant relationship between financial performance and financial risk management. The results of the analysis indicates that non performing loans ratio (NPLR) has a strong correlation with ROA and both cash to deposit ratio and current ratio have a weak correlation with ROA. Hence, the regression as whole is significant meaning that NPLR, Current Ratio and Cash to deposit ratio reliably predict ROA. The study recommends that banks should manage risks involved during their operations to minimize potential risks and losses involved and that dividends paid to shareholders should be well managed to maximize the profits. It also recommends that banks should develop strategies to manage risks involved during their operations