EFFECT OF CENTRAL BANK RISK MANAGEMENT GUIDELINES COMPLIANCE ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Banking failures coupled with declining profitability have been experienced in the Kenyan banking sector for a couple of years. This comes even after the Central Bank of Kenya has made concerted efforts to address the problem by introducing the risk management guidelines in 2005. Since the introduction of these guidelines, a total of seven bank failures have been recorded. Additionally, in its report on the financial position and performance of the Kenyan banking sector for 2016/2017, banks profitability recorded a decline compared to the previous year. This situation raises the issue of whether these guidelines have had any effect on enhancing bank performance. The objective of this study was to determine the effectiveness of central bank risk management guidelines on the financial performance of commercial banks in Kenya. The specific objectives of the study were to establish the effect of the board and senior management oversight, policies and procedures, internal controls system, risk monitoring and management information system, and capital and liquidity limits on financial performance of commercial banks in Kenya. The study further sought to establish the moderating effect of bank size on the relationship between central bank risk management guidelines and financial performance of commercial banks in Kenya. This study was guided by three theories: Stakeholder theory, Institutional theory, and systems theory. A descriptive research design was used for the study and the study‘s target population comprised of all the 42 commercial banks licensed by the central bank to operate in Kenya. Sampling was not required since the study adopted a census of all the banks. Both secondary and primary data were collected and subsequently analysed with the facilitation of the Statistical Package for Social Sciences. The analysis encompassed both descriptive and inferential statistics. The study found that compliance with risk management guidelines on board and senior management oversight, capital and liquidity limits, policies and procedures, and risk monitoring and management information system, did not have statistically significant effect on the financial performance of commercial banks in Kenya. However, compliance with the internal controls guidelines had a statistically significant effect on financial performance of the banks. The study further revealed that bank size had a significant moderating effect on the relationship between CBK‘s risk management guidelines compliance and financial performance of commercial banks in Kenya. It was concluded that bank size is a crucial factor in reference to how the compliance of commercial banks to the risk management guidelines laid down by the CBK affected the former‘s financial performance. The study recommended that, for the Central Bank of Kenya to formulate risk management guidelines that take consideration on bank size in terms of bank‘s overall financial strength, complexity of the institution‘s operations, scope of the institution‘s activities, size of the institution, and bank‘s years in operation. The findings of this study are beneficial to the Central Bank of Kenya in informing the review of the guidelines, management of commercial banks in making decisions and other scholars in the same area of study to provide literature.