Financial Risks Analysis and Performance of Commercial Banks in Kenya

Authors

  • Andrew Muriayi Juma Kenyatta University
  • Gerald Atheru Kenyatta University

Abstract

Commercial banks in Kenya often record inconsistent financial performance with some ending up under statutory receivership due to inability to meet their commitments to the stakeholders. Central Bank of Kenya usually put sound risk management guidelines to be followed by all the commercial banks yet losses are experienced in the banking sector. This study sought to investigate the effects of financial risks on performance of Commercial banks in Kenya. Specifically, the study sought to determine the effect of Liquidity risk, credit risks, interest rate risks and foreign exchange risks on return of assets of commercial banks in the country. The study was anchored within, enterprise risk management theory and adopted explanatory research design. Financial performance of commercial banks  was assessed in terms of return on assets where secondary data of the 42 commercial banks was collected for six years from 2010 to 2015. The source data collected was annual reports and financial statements of the commercial banks and Central Bank of Kenya and was analyzed by use of statistical panel data model. The study found out that liquidity risk and return on assets are positively and significantly related (r=0.039, p=0.000). Credit risk and return on assets were negatively and significantly related (r=-0.014, p=0.041); interest rate and return on assets were positively and significantly related (r=0.002, p=0.000) while foreign exchange risk and return on assets were negatively and significantly related (r=-0.003, p=0.000). Based on the findings, the study recommended that commercial banks to have a sound process for measuring, identifying, controlling and liquidity risk. Commercial banks should have a banking relationship with any entity or individual. It is essential that banking corporations have a comprehensive risk management process in place and that is subject to appropriate Board and Senior Management oversight. Commercial banks should also determine the risk appetite of its key stakeholders such as Directors.

Keywords: Liquidity risk, credit risks, interest rate risks, foreign exchange risks, return on assets of commercial banks

Author Biographies

Andrew Muriayi Juma, Kenyatta University

Graduate Student, Department of Accounting and Finance, Kenyatta University

Gerald Atheru, Kenyatta University

Department of Accounting and Finance, Kenyatta University

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Published

2018-11-16

How to Cite

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. Retrieved from https://stratfordjournals.org/journals/index.php/journal-of-accounting/article/view/211

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