Financial Risks and Financial Performance of Commercial Banks in Kenya

Authors

  • Jones Mwania Richard Kenyatta University
  • Mark Suva Kenyatta University

DOI:

https://doi.org/10.53819/81018102t4108

Abstract

Due to their erratic financial performance and failure to honour shareholder promises, the Kenyan central bank has formally placed a few commercial banks under receivership. Although commercial banks constantly use thorough risk management procedures, the banking industry nonetheless suffers losses. This results from the banking industry's exposure to risks related to liquidity, credit, interest rates, and foreign exchange rates. The purpose of this research was, thus, to assess the impact of credit, interest rate, and foreign currency rate risks on the return on equity of Kenyan commercial banks. The research study examined how financial risks affect Kenya's commercial banks' profits. The study was founded on agency theory and reinforced by international Fischer's affect theory, liquidity preference theory, and interest rate parity. This study employed a causal analysis approach. The participants in this study comprised all of the 39 commercial banks operating in Kenya between 2017 and 2021. The data collecting sheet was used to compile the secondary data. STATA was used to analyse the data using a panel regression model at a 95% level of significance. Tests for multicollinearity, heteroscedasticity, and normalcy as well as the Hausman test were established. Descriptive statistics such as mean, standard deviation and both the minimum and maximum were used to present the data. The study established that while credit risk had a significant negative impact on commercial banks' performance, liquidity risk had a significant positive benefit. Furthermore, exchange risk improved commercial banks' bottom lines, however, this benefit was not statistically significant. Finally, interest rate risk impacted commercial banks' bottom lines negatively but not statistically significantly. According to the study's findings, commercial bank management should be cautious when lending money to new clients and should evaluate existing customers' credit histories before extending credit. To support failing banks, the report suggested that the government and the Central Bank of Kenya increase the minimum liquidity ratio required by law. The government bank should keep a close eye on commercial banks' liquidity ratios to alert any that are having trouble meeting the minimum statutory requirement.

Keywords: Financial Risks, credit risk, liquidity risk, exchange rate risk, interest rate risk, financial performance

Author Biographies

Jones Mwania Richard , Kenyatta University

Master’s Student

Mark Suva, Kenyatta University

Lecturer, Department of accounting and finance

References

Abdulrehman, A. A., & Nyamute, W. (2018). Effect of mortgage financing on the financial performance of commercial banks in Kenya. Journal of International Business, Innovation and Strategic Management, 2(2), 91-122.

Alqahtani, F., Mayes, D. G., & Brown, K. (2017). Islamic bank efficiency compared to conventional banks during the global crisis in the GCC region. Journal of International Financial Markets, Institutions and Money, 51, 58-74. https://doi.org/10.1016/j.intfin.2017.08.010

Asiamah, N., Mensah, H. K., & Oteng-Abayie, E. F. (2017). General, target, and accessible population: Demystifying the concepts for effective sampling. The Qualitative Report, 22(6), 1607. https://doi.org/10.46743/2160-3715/2017.2674

Charmler, R., Musah, A., Akomeah, E., & Gakpetor, E. D. (2018). The impact of liquidity on the performance of commercial banks in Ghana. Academic journal of economic studies, 4(4), 78-90.

Chidozie, U. E., & Ayadi, F. S. (2017). Macroeconomy and banks’ profitability in Nigeria. African Research Review, 11(2), 121-137. https://doi.org/10.4314/afrrev.v11i2.10

Chireka, T., & Fakoya, M. B. (2017). The determinants of corporate cash holdings levels: evidence from selected South African retail firms. Investment Management & Financial Innovations, 14(2), 79. https://doi.org/10.21511/imfi.14(2).2017.08

Chukwunulu, J. I., Ezeabasili, V. N., & Igbodika, M. N. (2019). Risk Management and the performance of commercial banks in Nigeria (1994-2016). International Journal of Banking and Finance Research, 5(1), 64-71.

Drechsler, I., Savov, A., & Schnabl, P. (2021). Banking on deposits: Maturity transformation without interest rate risk. The Journal of Finance, 76(3), 1091-1143. https://doi.org/10.1111/jofi.13013

Gan, P. T. (2019). Economic uncertainty, precautionary motive and the augmented form of the money demand function. Evolutionary and Institutional Economics Review, 16(2), 397-423. https://doi.org/10.1007/s40844-019-00131-7

Gikombo, E. M., & Mbugua, D. (2018). Effect of select macro-economic variables on the performance of listed commercial banks in Kenya. International Academic Journal of Economics and Finance, 3(1), 80-109.

Hoque, M. A., Ahmad, A., Chowdhury, M. M., & Shahidullah, M. (2020). Impact of Monetary Policy on Bank’s Profitability: A Study on Listed Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 5(2), 72-79. https://doi.org/10.46281/ijafr.v5i2.796

Iacus, S. M., King, G., & Porro, G. (2019). A theory of statistical inference for matching methods in causal research. Political Analysis, 27(1), 46-68. https://doi.org/10.1017/pan.2018.29

Isanzu, J. S. (2017). The impact of credit risk on the financial performance of Chinese banks. Journal of International Business Research and Marketing, 2(3). https://doi.org/10.18775/jibrm.1849-8558.2015.23.3002

Ismailov, A., & Rossi, B. (2018). Uncertainty and deviations from uncovered interest rate parity. Journal of International Money and Finance, 88, 242-259. https://doi.org/10.1016/j.jimonfin.2017.07.012

Juma, A. M., & Atheru, G. (2018). Financial Risks Analysis and Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 2(2), 76-95.

Kalemli-Ozcan, S., & Varela, L. (2019, April). Exchange rate and interest rate disconnect: The role of capital flows, currency risk and default risk. In Society for Economic Dynamic Meeting Papers (Vol. 351).

Krisnasari, A. R. (2019). Analysis of Money Demand in Indonesia Period 2009-2018 (Doctoral dissertation, Universitas islam Indonesia).

Mabati, J. R., & Onserio, R. F. (2020). The Effect of Central Bank Rate on Financial Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 4(5), 25-40.

Maniagi, G. M. (2018). Influence of financial risk on the financial performance of commercial banks in Kenya (Doctoral dissertation, JKUAT).

Maria-Daciana, R. C. (2015). The Financial Performance of Commercial Banks Listed and Traded On Bucharest Stock Exchange. Revista Economica, 67(Supplement), 135-144.

Mugenda, O. & Mugenda, P (2003).Qualitative and Quantitative Research Methods. Kenya.

Munge, S. K. (2020). Enforcement of the Prudential Guideline no. 13 (enforcement of banking laws and regulations-CBKPG13) by The Central Bank of Kenya (CBK) a case study of Chase Bank (Now SBM) for the period before and after its being placed under statutory management (Doctoral dissertation, Strathmore University).

Muriithi, J. A (2016). Effect of Financial Risk on Financial Performance of Commercial Banks in Kenya. https://doi.org/10.9790/5933-0704017283

Muthinja, M. M., & Chipeta, C. (2018). What drives financial innovations in Kenya’s commercial banks? An empirical study on firm and macro-level drivers of branchless banking. Journal of African Business, 19(3), 385-408. https://doi.org/10.1080/15228916.2017.1405705

Mwai, A. M. (2021). Financial Innovations and Financial Deepening of Commercial Banks in Kenya (Doctoral dissertation, JKUAT-COHRED).

Mwangi, B. M., & Jagongo, A. O. (2021). Effect of Organization Redesign Strategy on Performance of Commercial Banks in Nairobi County, Kenya. Journal of Finance and Accounting, 1(2), 23-33.

Ndagara, M. M., Mugendi, L. K., & Galo, N. M. (2020). Effectiveness of monetary policy intervention on exchange rate volatility in Kenya.

Ndalu, C. N. (2018). Effect of Credit Risk Management on Financial Performance of Deposit Taking Saving and Credit Co-Operatives Societies in Kenya (Doctoral dissertation, University of Nairobi).

Nzuve, R. M (2016). Impact of Macroeconomic Factors on Financial Performance of Deposit- Taking Micro Finance Institutions in Kenya.

Olowo, S. O., Edewusi, G. D., & Dada, J. D. (2021). Effects of Selected Macroeconomic Variables on Commercial Banks Performance in Nigeria. FUDMA JOURNAL OF MANAGEMENT SCIENCES, 1(1), 42-53.

Paul, S., & Musiega, M. (2020). Effect of Credit Risk Management Practices on Financial Performance of Micro-Finance Institutions in Nairobi. International Journal of Recent Research in Social Sciences and Humanities, 7(3), 22-39.

Reimann, M., & Jain, S. P. (2021). Maladaptive Consumption: Definition, Theoretical Framework, and Research Propositions. Journal of the Association for Consumer Research, 6(3), 000-000. https://doi.org/10.1086/714822.

Ringle, C. M., Wende, S & Becker. J. C. (2015). SmartPLS 3. Bonningstedt: SmartPLS. Retrieved on 2018.06.012 from http://www.smartpls.com.

Tekin, H., & Polat, A. Y. (2020). Agency Theory: A Review in Finance. Anemon Muş Alparslan Üniversitesi Sosyal Bilimler Dergisi, 8(4), 1323-1329. https://doi.org/10.18506/anemon.712351

Umar, H., & Dikko, M. U. (2018). The effect of internal control on the performance of commercial banks in Nigeria. International Journal of Management Research, 8(6), 13-32.

Zins, A., & Weill, L. (2017). Islamic banking and risk: The impact of Basel II. Economic Modelling, 64, 626-637. https://doi.org/10.1016/j.econmod.2017.05.001

Downloads

Published

2022-11-24

How to Cite

Mwania , R. J. ., & Suva, M. . (2022). Financial Risks and Financial Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 6(5), 22–40. https://doi.org/10.53819/81018102t4108

Issue

Section

Articles

Most read articles by the same author(s)