Financial Crime World

Financial Institution Risk Management in Kenya: A Study on Credit, Liquidity, and Interest Rate Risks’ Impact on Commercial Banks’ Performance

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Kenya’s banking industry has faced numerous bank failures due to poor risk management and lack of preparedness. Despite their crucial role in allocating resources for the nation, commercial banks are susceptible to various uncertainties related to lending. To reduce or minimize these risks, banking executives require reliable and sufficient measures.

Objectives

The main objective of this study is to examine the impact of risk management on commercial banks’ performance in Kenya, with a specific focus on credit, liquidity, and interest rate risks.

Methodology

A descriptive design was employed, targeting 40 Kenyan banks over the period of 2013 to 2017. Theories such as Risk Theory, Moral Hazard Theory, Modern Portfolio Theory, and Agency Theory were used to analyze the data.

Findings

The study’s findings revealed that:

  • Credit risk did not significantly affect financial performance in commercial banks in Kenya.
  • Liquidity risk was not a key determinant of financial performance.
  • Interest rates emerged as a crucial factor influencing commercial banking performances.

Conclusion

The study concludes that bank management should continually adjust interest rates in line with prevailing economic conditions to ensure optimal performance. The findings suggest that there is a need for commercial banks in Kenya to develop and implement effective risk management strategies to mitigate the impact of credit, liquidity, and interest rate risks on their financial performance.

Implications

The results of this study have significant implications for:

  • Policymakers: highlighting the importance of interest rates in influencing commercial banking performances.
  • Regulatory bodies: emphasizing the need for banks to develop effective risk management strategies that account for these factors.
  • Bank managers: underscoring the need for banks to continually adjust interest rates and implement effective risk management strategies.

Overall, this study highlights the significance of interest rates in influencing commercial banking performances and underscores the need for commercial banks in Kenya to develop and implement effective risk management strategies.