FINANCIAL RISKS AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE, KENYA
FINANCIAL RISKS AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE, KENYA
Mable Sophie Malalu - Master of Business Administration (Finance Option), Kenyatta University, Kenya
Dr. Charity Njoka - Lecturer, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
Despite the implementation of comprehensive risk management systems by commercial banks, the banking sector incurs financial losses. Commercial banks listed on the Nairobi Security Exchange are experiencing declining financial performance. Financial risk management is regarded as a metric for assessing the performance or failure of a financial organization. It has been neglected in recent a long time. The main objective of the study is to ascertain the effect of financial risk on the financial performance of commercial banks listed on the Nairobi Securities Exchange in Kenya and will be measured by return on equity. This study was based on Merton's Default Risk Model, Agency Theory, Shiftability Liquidity Model, and Risk Management Theory. Explanatory research design was used for study. The sample is 11 listed commercial banks being focused from the year 2018 to 2023. The data collecting sheet was employed to amass the secondary data. The ethical considerations were observed to. The variables were analysed using IBM SPSS Version 25. Tests for multicollinearity, heteroscedasticity, correlation, regression as well as the Hausman test were established. The findings on credit risk indicated that the mean Non-Performing Loans Ratio is 11.062% which show moderate negative correlation between credit risk and financial performance of listed bank at (r=0.324; p=0.0016). Operational risk results indicated a strong positive and significant association between operational risk and financial performance(r=0.758 and p=0.00168) while liquidity risk showed that the mean of loan to deposit ratio is 72.847% and a weak positive correlation relationship between liquidity risk and financial performance (that r=0.0652 and p=0.003).From the finding the study conclude that credit risk, operational risk and liquidity risk has significant influence on financial performance of listed commercial banks. The study recommends that banks should engage in continuous monitoring of credit portfolios, invest in capacity building for enhanced risk management capabilities. Banks should conduct regular comprehensive risk assessments, invest substantially in technology for robust IT systems, and engage in scenario planning to anticipate and address potential operational risks. In addition, the listed banks should diversify funding sources, employ advanced risk modelling for robust liquidity risk management.
