IDEAS home Printed from https://ideas.repec.org/a/bcp/journl/v6y2022i6p261-270.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: https://www.rsisinternational.org/journals/ijriss/Digital-Library/volume-6-issue-6/261-270.pdf
    Download Restriction: no
    File URL: https://www.rsisinternational.org/virtual-library/papers/effect-of-financial-risks-on-financial-performance-of-tier-one-commercial-banks-in-kenya/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kehrwald, Bernie, 2014. "The Excess Demand Theory of Money," MPRA Paper 57603, University Library of Munich, Germany.
    2. Marc Lavoie, 2014. "A comment on 'Endogenous money and effective demand': a revolution or a step backwards?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(3), pages 321-332, July.
    3. Pesenti, Amos, 2015. "The origin of inflation in a domestic bank-based payment system," FSES Working Papers 457, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    4. Rohwer, Götz & Behr*, Andreas, 2020. "Revenues from Financial Capital. A Formal Framework," MPRA Paper 99306, University Library of Munich, Germany.
    5. Walter Buhr, 2018. "Institutional Economics: A Sketch of Economic Growth Policy," Volkswirtschaftliche Diskussionsbeiträge 183-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    6. Jakab, Zoltan & Kumhof, Michael, 2018. "Banks are not intermediaries of loanable funds — facts, theory and evidence," Bank of England working papers 761, Bank of England, revised 17 Jan 2020.
    7. Claudio Borio & Piti Disyatat, 2015. "Capital flows and the current account: Taking financing (more) seriously," BIS Working Papers 525, Bank for International Settlements.
    8. Severin Reissl, 2015. "The return of black box economics - a critique of Keen on effective demand and changes in debt," IMK Working Paper 149-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. Benjamin Otwoko & Kimani Maina, 2021. "Effect of liquidity risk on the financial performance of deposit taking savings and credit cooperative organisations (SACCOs) in Kenya," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(2), pages 203-211, March.
    10. Bofinger, Peter & Ries, Mathias, 2017. "Excess saving and low interest rates: Theory and empirical evidence," CEPR Discussion Papers 12111, C.E.P.R. Discussion Papers.
    11. Jiahua Xu & Nikhil Vadgama, 2021. "From banks to DeFi: the evolution of the lending market," Papers 2104.00970, arXiv.org, revised Dec 2022.
    12. Ponomarenko, Alexey A. & Ponomarenko, Alexey N., 2018. "What do aggregate saving rates (not) show?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-20.
    13. Sharmila Devadas & Norman Loayza, 2018. "When is a Current Account Deficit Bad?," World Bank Publications - Reports 30506, The World Bank Group.
    14. narjess BOUABDALLAH & jamel Eddine HENCHIRI, 2020. "L' impact des mécanismes de gouvernance interne sur le risque opérationnel bancaire," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 11(1), pages 151-189, June.
    15. Spahn, Peter, 2019. "Keynesian capital theory: Declining interest rates and persisting profits," Hohenheim Discussion Papers in Business, Economics and Social Sciences 10-2019, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    16. Sergio Cesaratto, 2017. "Beyond the traditional monetary circuit: endogenous money, finance and the theory of long-period effective demand," Department of Economics University of Siena 757, Department of Economics, University of Siena.
    17. Decker, Frank & Goodhart, Charles A. E., 2022. "Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate," LSE Research Online Documents on Economics 111819, London School of Economics and Political Science, LSE Library.
    18. Olajide Solomon Fadun & Diekolola Oye, 2020. "Impacts of Operational Risk Management on Financial Performance:A Case of Commercial Banks in Nigeria," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(1), pages 22-35, January.
    19. Kah Chon, Ooi, 2019. "Impacts Of Firm-Specific Factors And Macroeconomic Factors Against Microsoft’S Performance," MPRA Paper 97254, University Library of Munich, Germany, revised 15 Nov 2019.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcp:journl:v:6:y:2022:i:6:p:261-270. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Pawan Verma (email available below). General contact details of provider: https://www.rsisinternational.org/journals/ijriss/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.