Financial Risks and Financial Performance of Commercial Banks in Kenya
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
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