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Effect of Financial Risks on Financial Performance of Tier One Commercial Banks in Kenya

Author

Listed:
  • Gloria Dhahabu

    (School of Business, South Eastern Kenya University)

  • Gitonga Doreen

    (School of Business, South Eastern Kenya University)

  • Barasa Eliakim

    (School of Business, South Eastern Kenya University)

  • Moses Kiarie

    (School of Business, South Eastern Kenya University)

  • Ruth Kibaara

    (School of Business, South Eastern Kenya University)

  • Dismas Omimi

    (School of Business, South Eastern Kenya University)

  • Evusa Zablon

    (School of Business, South Eastern Kenya University)

  • Ngeta Jacqueline

    (School of Business, South Eastern Kenya University)

Abstract

For a given time and a specific benchmark, an investment’s risk may be expressed as an uncertainty measure of the investment’s future reward. When business initiative fails to pay off, there is the potential for capital loss to those involved. Studying how Kenya’s tier one commercial banks financial performance is affected by financial risks is the main purpose of this research. The specific objectives of this study was to establish the effect of Liquidity risk, interest rate risk, credit risk, and foreign exchange risk on the financial performance of tier one commercial banks. The independent variable in this study were interest rate risk, liquidity risk, credit risk and exchange rate risk while the dependent variable was financial performance of tier 1 commercial banks in Kenya. This research employed a variety of theories which include; the loanable fund theory, information Asymmetry theory, purchasing power parity theory and the theory of bank liquidity. The financial statements of Kenya’s nine major commercial banks were utilized in this research. A simple research design was used in this investigation. The research employed Census sampling method that is, it focused on the nine-tier 1 CBK-licensed commercial banks. The secondary data information was obtained from audited financial statements of the commercial banks under study. The study covered a period of 5 years from 2016- 2020. The data was arranged and financial ratios calculated. IBM SPSS statistics version 22 was used to construct tables, charts, correlations, and regressions. The study found out that liquidity risk and Return on Assets are positively and significantly related (β=0.348, p=0.00), credit risk and Return on Assets are positively and insignificantly related (β=0.018, p=0.667), foreign exchange risk and Return on Assets are negatively and significantly related (β= -0.028, p=0.392) and Interest rate risk and Return on Assets is negatively and insignificantly related (β= -0.281, p= 0.155). The study concluded that liquidity risk and credit risk have a positively related to Return on Assets while foreign exchange risks and interest rate risk have negatively related to Return on Assets. The study recommends that tier one commercial banks should hold more of their assets in liquid form to enhance borrowing. Bank management should carry out a rigorous due diligence before loaning out their funds to avoid default risk. The central banks should reduce its reserves to enable commercial banks to have more liquid assets and money to loan because increase in reserves puts excessive strain on banks and reduces liquid assets.

Suggested Citation

  • Gloria Dhahabu & Gitonga Doreen & Barasa Eliakim & Moses Kiarie & Ruth Kibaara & Dismas Omimi & Evusa Zablon & Ngeta Jacqueline, 2022. "Effect of Financial Risks on Financial Performance of Tier One Commercial Banks in Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(6), pages 261-270, June.
    • Handle: RePEc:bcp:journl:v:6:y:2022:i:6:p:261-270
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    References listed on IDEAS

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    1. Giancarlo Bertocco, 2013. "On Keynes's Criticism of the Loanable Funds Theory," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 309-326, April.
    2. Vincent Okoth Ongore & Gemechu Berhanu Kusa, 2013. "Determinants of Financial Performance of Commercial Banks in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 237-252.
    3. Jane Gathigia Muriithi & Kennedy Munyua Waweru, 2017. "Liquidity Risk and Financial Performance of Commercial Banks in Kenya," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(3), pages 256-265, March.
    4. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
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