Effect of Risk Identification Practices on Financial Performance of Commercial Banks in Kenya.

George Munene Macharia; David Ndumo; Solomon Muriiki

doi:10.61108/ijsshr.v3i3.211

Authors

George Munene Macharia Scholar, Presbyterian University of East Africa, Kenya
Dr. David Ndumo, (PhD) Senior Lecturer, Presbyterian University of East Africa, Kenya https://orcid.org/0009-0001-2011-7703
Dr. Solomon Muriiki, (PhD) Senior Lecturer, Presbyterian University of East Africa, Kenya https://orcid.org/0009-0005-2042-3371

DOI:

https://doi.org/10.61108/ijsshr.v3i3.211

Keywords:

Risk Identification, Financial Performance, Commercial Banks

Abstract

In an increasingly volatile global financial climate, commercial banks' ability to anticipate hazards before they occur has become a critical determinant of survival and profitability. This study investigated the impact of risk identification techniques on the financial performance of commercial banks in Kenya, acknowledging that risk identification is the foundation of good risk management. Based on Agency Theory, the study stressed the link between managerial responsibility and shareholder profit through clear and systematic risk detection. A multidimensional research design was used, based on a positivist worldview. The target population consisted of 2,293 senior management workers from 38 commercial banks, with a stratified random sample of 266 respondents. Primary data were gathered through structured questionnaires, while secondary financial data were obtained from the Central Bank of Kenya and audited reports covering the years 2019-2023. Statistical analysis with SPSS (version 27) included descriptive, correlation, and regression procedures. The study found a substantial positive correlation between risk detection techniques and financial performance (r = 0.679, p < 0.05). Regression study showed that risk brainstorming sessions (β = 0.467), documentation review (β = 0.453), and stakeholder participation (β = 0.190) significantly improved banks' returns on assets, equity, and profitability. The study indicated that systematic and continual risk identification is crucial for maintaining competitiveness, reducing losses, and improving financial stability. It suggests that banks organize regular cross-departmental brainstorming sessions, implement technical analytics tools, and strengthen stakeholder collaboration to improve proactive risk detection. Furthermore, the Central Bank of Kenya should standardize and monitor risk identification procedures across all commercial banks to ensure systemic stability. Overall, the study contributes to the increasing body of financial risk management literature by establishing that effective risk identification is not only a defensive mechanism but also a strategic driver of long-term financial performance in Kenya's banking system.

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