Relationship Between Financial Risks Management And Operating Efficiency Of Commercial Banks In Kenya

Abstract

Financial feasibility and durable sustainability of Kenyan commercial banks are endangered by financial risks. For the past twenty years, financial risk management has added a noticeable part in banks. The association between risks management and operations efficiency in commercial banks is one of the most significant practices used in banks to achieve higher returns. In today’s dynamic environment, nothing is constant other than risks. Banks are exposed to a number of risks such as credit risk, liquidity risks, operational risks, credit risks among other risks. An efficient risk management system needs to be observed from time to time. The risks and returns are directly related to each other, an implication that an increase in one will subsequently lead to an increase of the other and vice versa. Operating efficient is the ability to deliver products and services without forfeiting quality and it is essential for a well-functioning economy. Banks operate efficiently by directing depositors’ savings towards enterprises with highest expected returns through monitoring them carefully after lending depositors’ scarce resources. Kenyan Commercial banking is the largest supplier of credit as well as the largest in terms of asset in the financial services industry. The study endeavored to examine the relationship between financial risk management and operational efficiency by Commercial banks in Kenya. Particularly, the study investigated the effect of banks specific performance indicators. Credit risk, liquidity risk, operation risk and market risk on operating efficiency of commercial banks. The study adopted explanatory research design using panel data, secondary data was obtained from annual financial statements and reports of 42 commercial banks licensed to operate in Kenya for a period of 5 years that is from 2014-2018. Banks with more than 10% missing data were purged out to remain with 38 commercial banks were then analyzed using STATA. Data was analyzed using panel data regression model to attain the best regression equation. Statistical significance shall be checked by F-Test of the overall Fit and t-tests of individual parameter. The study recommends that managers and regulatory authority to concentrate on mitigating financial risks management so as to improve operating efficiency in Kenya.