Effect Of Financial Risk On Financial Performance Of Commercial Banks Listed On Nairobi Securities Exchange In Kenya

Abstract

Financial risk concerns have been increasing and in this risk environment, banks are looking to develop robust financial risk management frameworks that satisfies compliance demands, results to better decision making and also enhances performance. This study sought to investigate the effect of financial risk on financial performance of commercial banks in Kenya listed on the NSE. The study used the major financial risk according to Basel Committee of Banking Supervision that is operational risk, credit risk, market risk and liquidity risk. The study adopted descriptive research design approach and used secondary data for the 11 listed commercial banks. The data was obtained from the published financial statements of the commercial banks which is available from NSE, websites of the respective commercial banks and the CMA. This research covered a period of 10 years from the years 2010 to 2019. The 10-year period was necessary to enable panel data analysis. The results indicated that there was a negative and significant relationship between liquidity risk and financial performance of listed commercial banks in Kenya (β= -3.5221, p=0.0090). Further, the results indicated a negative and significant relationship between credit risk and financial performance of commercial banks listed in the Kenyan NSE (β=-4.2020, p=0.0010). Market risk had a negative and significant relationship with financial performance of listed commercial banks in Kenya (β= -2.6809, p=0.0450). Lastly, operational risk revealed a negative but insignificant relationship with financial performance of listed commercial banks in Kenya (β= -1.7752, p=0.2050). Based on the study findings the study concluded that there is a strong correlation between liquidity risk, credit risk, market risk and operational risk on financial performance of commercial banks listed with the Nairobi Securities Exchange. The study recommended that the managers could minimize credit risk by ensuring that the credit worthiness of would-be borrowers is assessed together with the collateral which should be wholly ensured. The study recommends that bank managers should ensure that commercial banks invest excess cash in productive assets. Lastly, the study recommends that the banks should establish financial risk early warning mechanism so that managers can take effective real time comprehensive management to reflect banks financial position including financial structure, profitability and asset utilization to enhance operational efficiency.