Abstract:
The main objective of the study was to determine the influence of financial risk on performance of commercial banks in Kenya. The specific objectives were to determine the influence of market risk on performance of commercial Banks, to determine the influence of credit risk on performance of commercial Banks, to determine the influence of interest rate risk on performance of commercial Banks, to determine the influence of foreign exchange risk on performance of commercial Banks, to determine the influence of liquidity risk on performance of commercial Banks and to determine the influence of bank size as a control variable on performance of commercial Banks in Kenya. Despite the banking sector stability and resilience in 2015, two non-systemic banks, were placed in receivership by the Central Bank of Kenya this was attributed to liquidity risk and failure to owner debt and lack of adequate provision for non-performing loans. Both primary and secondary data were used in the study. The research philosophy that was adopted for this research is that pursued by positivists and descriptive survey research design was applied. The population for secondary data were the 44 commercial banks in Kenya of which 2 were under receivership and one under statutory management. Panel data for 30 commercial banks that had data for 10 year period from 2006 to 2015 were obtained from the central bank of Kenya and banks website. For primary data the population was 220 respondents comprising risk manager, operations manager, general manager and credit manager all were used in the study. Self-administered questionnaire was used. Descriptive statistics, correlation analysis, and random and fixed effects were used for secondary data using E-views software while for primary spss-v 22 where descriptive analysis and inferential where factor analysis, correlation and regression were used. The findings were under longer period that capture various trade cycles credit risk had a significant negative relationship with performance hence managers should aim at reducing this risk to increase performance while market risk and interest rate risk had a significant positive relationship with performance this means that managers should expect increase in performance when interest rate and foreign exchange increase. The thesis recommend that Bank managers should adopt policies to control debtors figure relative to total capital as this increases credit risk, credit worthiness of would be borrowers is assessed and collateral which should be wholly ensured, credit limits which could be based on group authority. Commercial banks should focus on hedging and forecasting the macroeconomic factors that determine interest rates rather than the focusing on interest rates .Managers should ensure that commercial banks invest excess cash in productive assets. This ensures that they do not hold excess cash at the expense of fixed assets that can improve profitability. Managers should steer their banks toward trading in foreign exchange as this will improve performance of the banks as increase in foreign exchange risk leads to increase in performance or profitability Organisation monitoring all open positions arising from bank activities. Like financial risk early warning mechanism so that managers can take effective real time comprehensive management to reflect banks financial position