dc.description.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. Diagnostics tests such as multicollinearity,
autocorrelation and heteroscedasticity tests were performed to eliminate unbiasedness. The study
found out that liquidity risk and return on assets are positively and significantly related (β=0.039,
p=0.000).Credit risk and return on assets were negatively and significantly related (β=-0.014,
p=0.041); interest rate and return on assets were positively and significantly related (β=0.002,
p=0.000) while foreign exchange risk and return on assets were negatively and significantly related
(β=-0.003, p=0.000). The study concluded that liquidity risk and interest rate have a positive and
significant effect on performance while credit risk and exchange risk have a negative and
significant on performance of Commercial banks in Kenya. Based on the findings and conclusion,
the study recommended that commercial banks to have a sound process for measuring, identifying,
controlling and liquidity risk. 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. The study also recommends that commercial banks should explore avenues to enhance
capacities within banks for managing interest rate risks. Lastly, the study recommends the use of
Forward exchange contract. Forward exchange contract helps businesses to cushion from the
adverse shifts in exchange rates by fixing an exchange rate until future date. | en_US |