Risk Management and Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Purpose: In order to reduce any negative consequences on their performance, it is essential for financial institutions to achieve a balance between risk and return. Organizations with effective risk management practices are more likely to succeed in achieving their operational business objectives. 2013 saw a review of commercial bank laws by the Central Bank of Kenya. As a result of these reviews, certain banks began to experience difficulties with their financial performance. Chase Bank and Imperial Bank, for instance, were placed under receivership in 2015 and 2016, respectively. So the question is, was bad financial management influenced by risk management? This was the impetus behind the study's primary goal, which was to ascertain how risk management and the financial success of banks listed on the NSE interacted. The study's specific goals included figuring out how operational risk management affects financial performance, as well as how liquidity risk management affects financial performance, credit risk management's impact on financial performance, and market risk management's impact on financial performance. Risk management theory, liquidity preference theory, adverse selection theory, and extreme value theory served as the study's guiding principles.

Methodology: The correlational research approach was used in this study to evaluate these difficulties. The 12 listed commercial banks provided the study with their data. A questionnaire was utilized as the tool for gathering data in this study. To analyze the data, descriptive and inferential statistics were both used. Means and standard deviation were used for descriptive statistics.

Findings: The output of the study shows that a positive association exists between operational risk management and financial performance. The findings revealed a positive relation between liquidity risk management and financial performance. On the same note, it came out from the output that risk management and financial performance are too positively related. Finally the results showed a positive association between market risk management and financial performance.

Unique contribution to theory, practice and policy: The study offered the following suggestions. Develop and put into practice a comprehensive operational risk management system that discovers, evaluates, monitors, and controls operational risks. Commercial banks should do the same. The framework needs to match the bank's overall business plan, risk tolerance, and regulatory requirements.