Thesis:

Risk management and financial performance of commercial banks in Kenya

The study aimed to determine the connection between risk management and overall financial performance in commercial banks in Kenya. More specifically, it examined credit risk, liquidity risk, and capital/solvency risk, considering how these risks affect the financial well-being and stability of these institutions. The study used a descriptive research methodology to establish directional links between independent factors and the dependent variable. The study included all 38 licensed commercial banks in Kenya from 2014 to 2023, using panel data from the Central Bank of Kenya, financial statements, and the Kenya National Bureau of Statistics. Using descriptive research design the study examined the relationship between risk management practices using descriptive statistics such as mean values and standard deviations. Additionally, inferential statistics such as correlation and regression analysis were performed to establish the causal relationship between the independent and the dependent variables. From the study, a significant negative correlation was established between credit risk and financial performance (r = 0.992, P< 0.05). Further, a negative regression coefficient was established between credit risk and financial performance (β = -0.261). Also, a negative but insignificant correlation was established between liquidity risk and financial performance (r = -0.026, P< 0.05). Further, a negative regression coefficient was established between credit risk and financial performance (β = -0.182). finally, a weak negative correlation was established between capital risk and financial performance (r = -0.019, P< 0.05). Further, a weak negative regression coefficient was established between credit risk and financial performance (β = -0.005). On the causal relation between the independent variables and ROE, a significant negative correlation was established between credit risk and ROE (r = -0.02, P>0.05). Further, a significant negative regression coefficient was established between credit risk and financial performance (β = -3.691). Also, a positive significant correlation was established between liquidity risk and financial performance (r = 0.145, P< 0.05). Further, a negative regression coefficient was established between credit risk and ROE (β = -0.056). Finally, a moderate negative correlation was established between capital risk and financial performance (r = -0.130, P< 0.05). Further, a weak positive regression coefficient was established between credit risk and ROE (β = 0.058).The study therefore concludes that credit risk, liquidity risk and capital risk have a negative impact on the financial performance of banks as measured by ROA. However, with ROE, credit risk and capital risk have a positive relationship with ROE but liquidity risk has a negative relationship with ROE. The study therefore recommends effective risk management among commercial banks in Kenya as this risk can impact commercial banks. Finally, the study recommends stricter regulation and monitoring of risks affecting commercial banks in Kenya to maintain stability in the sector.