EFFECTS OF FINANCIAL RISK ON PROFITABILITY OF COMMERCIAL BANKS LISTED IN THE NAIROBI SECURITIES EXCHANGE

Kiragu Duncan Ndegwa

Abstract


Profitable and strong banking system promotes broader financial stability and increases the economy’s resilience to adverse macroeconomic shocks. The current challenges’ facing the financial services industry includes customer retention, financial risk, legal and compliance risk, strategic risk, technological risk and stiff competition from MFIs, mortgage firms and SACCOs. The study focused on the effects of financial risk on profitability of commercial banks listed in the Nairobi Securities Exchange. The study used quantitative research design. Time Series Cross Sectional (TSCS) data was used. Panel data estimation technique was adopted. The target population of this study comprised of all the 11 commercial banks in Kenya that are listed in the Nairobi Securities Exchange. The study employed secondary data that was extracted from audited financial statements and annual reports of listed commercial banks over the 10-year period, 2007 to 2016. The collected quantitative data was edited and coded and entered into a Stata version 14 for analysis. Both descriptive and inferential statistics was used to analyses the quantitative data. The study established that there was a strong correlation between profitability and credit risk. The study found that an increase in market risk would lead to decrease in profitability. The study revealed there was strong correlation between profitability and market risk. The study also found that liquidity risk was statistically significant in affecting profitability of commercial banks. The study revealed that an increase in operational risk would lead to decrease in profitability. The study recommends there is need for the management of commercial bank to control their credit risk, through non-performing loan level as it was revealed that credit risk negatively affect the financial performance of commercial banks in Kenya. The management of commercial banks in Kenya should hedge against market  risk as it was found that market risk negatively affect the profitability of commercial bank in Kenya.

Keywords: Financial risk, profitability, credit risk, market risk, liquidity risk, operational risk


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References


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