Financial Risk and Financial Performance of Listed Commercial Banks in Kenya.

Abstract

At its core, commercial banking is a business deeply entrenched in the dynamics of risk and reward. Financial risks, encompassing credit, liquidity, price and operational risks, serve as inherent components of banking activities. These risks are not only omnipresent but also inherently interconnected, creating a complex web that directly influences financial performance of commercial banks. The purpose of the study was to determine the effect of financial risk on financial performance of listed commercial banks in Kenya. The study was grounded on extreme value theory, credit risk theory, asymmetry information theory and liquidity preference theory. Correlational research design was adopted in the study as it helps researcher explore and explain the effects of financial risks on the financial performance of commercial banks. Nairobi Securities Exchange (2023) indicates that there are 10 commercial banks listed in NSE as of 31st December 2023. The target population consisted of all 10 listed commercial banks in Kenya which formed the unit of analysis. Time Series secondary panel data was utilized. The data was obtained from published financial statements of 10 listed commercial banks, and CBK bank supervision reports from 2019 to 2023.The coefficient of determination (R2) was used to determine how much variation in dependent variable is explained by explanatory variables. Statistical Package for Social Science was used as data analysis tool. Results showed that credit risk, price risk and operating risk had negatively and significant effect on the financial performance of commercial banks in Kenya. However, liquidity risk had negative and insignificant effect on financial performance of listed commercial banks in Kenya. Also, majority of listed commercial banks had adequate liquidity to cover loans in the event of an economic downturn resulting in loan defaults. It was concluded that credit risk had a negative and statistically significant relationship with financial performance of commercial banks listed in NSE. This implies that when non-performing loans are increasing, performance is likely to be going down. It was also concluded that liquidity risk had a negative and insignificant effect on financial performance of commercial banks listed in NSE. . The study recommended that the managers of the bank to adopt the policies that will ensure debtors ratios does not increase at high ratios in relation to the total capital since this amounts to credit risk. The managers should minimize the credit risk by ensuring the credit worthiness of the clients is critically evaluated with collateral