EFFECT OF FINANCIAL RISK ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA LISTED ON THE NAIROBI STOCK EXCHANGE

Abstract

The general objective of this research was to investigate how financial risk affects the financial performance of commercial banks listed in the Nairobi Stock Exchange in Kenya. The independent variables in this study were; credit risk, market risk, liquidity risk and operational risk. The dependent variable was financial performance. The research targeted a population of all the 44 commercial banks in Kenya. The study had a sample population of the 11 listed commercial banks in the Nairobi Stock Exchange. The study conducted the research for a 5 year period between 2014-2018. The research design used during the study was descriptive. Secondary data for the 11 commercial banks was obtained from published bank’s financial statements and annual reports. Analysis of the data was done using the multiple regression model. The data collected was coded using SPSS and fed to excel data collection instrument. The analysed data was presented in form of tabulations, mean and standard deviation. The findings of the research obtained that credit risk, market risk and operational risk had a significant negative effect on financial performance, while liquidity risk had a negative insignificant effect on financial performance. The effect of financial risk on financial performance as measured by the four variables was found to be negative and significant. The study recommended that commercial banks should reduce the level of non- performing loans so as to manage credit risk, commercial banks should develop policies that enable a good environment for operation so as to manage market risk, commercial banks should adhere to statutory requirements on liquidity risk so as to control and manage liquidity risk and the managers of commercial banks should reduce their operating expenses so as to improve their shareholders wealth which will lead to managing operational risk. The study concluded that the relationship that exists between financial risk and the financial performance of commercial banks is significantly negative. Key