RESEARCH PROJECT

EFFECTS OF FINANCIAL RISK ANALYSIS ON PROJECT

PERFORMANCE, A CASE OF COMMERCIAL BANK IN KERICHO
COUNTY.

PRESENTED BY: GETRUDE CHELANGAT

INDEX NUMBER: 5780013215

COURSE CODE: 2922

PAPER CODE: 2922/308

INSTITUTION: THE ELDORET NATIONAL POLYTECHNIC

CENTER CODE: 578001

SUPERVISOR: MR. KURGAT

PRESENTED TO THE KENYA NATIONAL EXAMINATION COUNCIL

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
AWARD OF DIPLOMA IN PROJECT MANAGEMENT

SERIES: NOVEMBER 2022

 DECLARATION
This research project is my original work and has not been done anywhere, submitted or
presented for award of a diploma in any other College or for any other award.

NAME ADMISSION NUMBER SIGN DATE

GETRUDE CHELANGAT 18/03117 ………………… ………………..

This research proposal has been submitted with my approval as the College Supervisor.

MR. KURGAT ERNEST

Signature: ………………………………… Date: ……………

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 DEDICATION
I dedicate this project to my loving parents, my siblings and to my fellow students of the eldoret
national polytechnic.

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 ACKNOWLEDGEMENT
I am very grateful to Almighty God for enabling me come this far. my sincere gratitude also goes
to my friends and classmates for their continuous support and encouragement. I would also like
to acknowledge my supervisor Mr. Kurgat Ernest for his continuous guidance and tireless effort
and advice.

I would also like to acknowledge the administration of Eldoret National Polytechnic for
providing me with the chance to pursue my Diploma in Project Management this institution.
Much acknowledgement goes to all my lecturers for this course for their tireless efforts to impart
the necessary knowledge in me that has been of much importance in this study. They have really
been a source of inspiration to me.

Finally, to my fellow colleagues and group members who gave me the technical support and
guidance thus ensuring successful completion of my research project; and all the contributions
from my friends who gave much support in my studies and finances. Special thanks goes to my
family for the moral and financial support.

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 Table of Contents
DECLARATION.............................................................................................................................ii

DEDICATION...............................................................................................................................iii

ACKNOWLEDGEMENT..............................................................................................................iv

LIST OF FIGURES/TABLES.......................................................................................................vii

LIST OF ABBREVIATIONS......................................................................................................viii

DEFINITION OF TERMS.............................................................................................................ix

ABSTRACT....................................................................................................................................x

CHAPTER ONE..............................................................................................................................1

INTRODUCTION...........................................................................................................................1

1.0 Introduction............................................................................................................................1

1.1 Background of the Study........................................................................................................1

1.2 Statement of the Problem.......................................................................................................2

1.4 Objectives of the Study..........................................................................................................3

1.5 Research Questions................................................................................................................3

1.6 Justification of the Study........................................................................................................3

1.7 Limitations of Study...............................................................................................................4

CHAPTER TWO.............................................................................................................................5

LITERATURE REVIEW................................................................................................................5

2.0 Introduction............................................................................................................................5

2.1 Empirical Review...................................................................................................................5

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 2.2 Summary of Gaps identified from Reviewed Literature......................................................11

2.3 Theoretical Review..............................................................................................................11

2.4 Conceptual Framework........................................................................................................13

CHAPTER THREE.......................................................................................................................14

RESEARCH METHODOLOGY..................................................................................................14

3.0 Introduction..........................................................................................................................14

3.1 Research Design...................................................................................................................14

3.2 Target Population.................................................................................................................14

3.3 Sampling Technique............................................................................................................14

3.4 Data Collection Instrument..................................................................................................15

3.4.1 Questionnaire....................................................................................................................15

3.4.2 Interview Guide.................................................................................................................15

CHAPTER FOUR.........................................................................................................................17

Data Analysis, Findings, Recommendations and Conclusions.....................................................17

4.0 Introduction..........................................................................................................................17

4.1 Data Analysis and Findings.................................................................................................17

4.1.1 Data Analysis for Demographic Information....................................................................17

4.1.2 Financial risk analysis on commercial banks in Kericho..................................................19

4.1.3 Level of project performance in Commercial Banks........................................................21

4.1.4 The relationship between financial risk analysis and project performance......................22

4.1.5 Findings of the study.........................................................................................................23

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REFERENCES..............................................................................................................................27

APPENDICES...............................................................................................................................31

APENDIX I: QUESTIONNAIRE.............................................................................................31

vii
 LIST OF FIGURES/TABLES
Table 4.1: Response rate

Table 4.2: Descriptive statistics

Table 4.3: Correlation Analysis

Table 4.4: Regression Analysis

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 LIST OF ABBREVIATIONS
ANOVA: Analysis of Variance

CAPM: Capital Asset Pricing Model

CBK: Central Bank of Kenya

CCR: Counter party Credit Risk

CRD: Central Registration Depository

DTB: Diamond Trust Bank

EPS: Earnings Per Share

ERMS: Enterprise Risk Analysis System

GDP: Gross Domestic Product

I&M: Investment and Mortgages

KPMG: Klynveld Peat Marwick Goerdeler

LM : Lagrange Multiplier

MFI : Micro Finance Institution

MPT: Modern Portfolio Theory

NBI: National Bank of India

NCBA: National Commercial Bank of Africa

NGB: National Grind lays Bank

ROA: Return on Assets

UAEL: United Arab Emirates

VAR: Value at Risk

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 DEFINITION OF TERMS
Financial Risk Analysis-it is the process of protecting the economic value of a firm by using
financial instruments to manage risk exposure. It requires identifying the risk
sources, measuring them and plans on how to address them.
Commercial Banks- Large banks that have been operating in Kenya for many years with
millions of customers and have billions of assets
Financial Performance-it is a measure of how well a firm can use assets to generate revenues. It
is also a measure of firms overall financial health over a given period.
Credit risk: It occurs when borrowers or counterparties fail to meet contractual obligations. An
example is when borrowers default on a principal or interest payment of a loan
(Coyle,2000). Defaults can occur on mortgages, credit cards, and fixed income
securities. Failure to meet obligational contracts can also occur in areas such as
derivatives and guarantees provided.
Operational risk: It is the risk of loss due to errors, interruptions, or damages caused by people,
systems, or processes. The active type of risk is low for simple business operations
such as retail banking and asset management and higher for functions such as sales
and trading. Losses that occur due to human error include internal fraud or mistakes
made during transactions. An example is when a teller accidentally gives an extra
$50 bill to a customer.
Market risk: It occurs from a bank's activities in capital markets. Due to the unpredictability of
equity markets, commodity prices, interest rates, and credit spreads. Banks are more
exposed if they are heavily involved in investing in capital markets or sales and
trading.
Liquidity risk- refers to a bank's capacity to obtain funds to satisfy funding obligations.
Allowing consumers to withdraw their deposits is one of the obligations. The
inability to give funds to consumers on schedule might have a snowball effect. If
the bank delays releasing cash to a handful of its customers for a day, other
depositors may rush to withdraw their funds as they lose faith in the bank. This
reduces the bank's capacity to supply cash even further, resulting in a bank run.

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 ABSTRACT
The purpose of this research is to bring to light the need for financial institutions to pay attention
to financial Risk Analysis. The issue in this research is to analyze whether financial Risk
Analysis in Kericho Commercial Bank helps improve the banks' financial performance. The
specific objectives are; to find out the financial risk analysis in place in kericho county. To
assess the level of project performance in commercial bank in kericho county,to establish
relationship between financial risk analysis and project performance in kericho
countyCommercial Bank. This topic involved the following theories; modern portfolio theory,
agency theory and risk theory. This study's target population was the risk and compliance
department for the Kericho Scommercial Bank. The study did not employ any sampling
technique because the population was manageable. The research project analysis used a
regression analysis model to get the turnover statistics, mean and standard deviation. This study
also used both primary and secondary data. The questionnaire was used to collect mainly
quantitative data. In contrast, secondary data involved collecting and analyzing published
material and information from other sources such as annual reports and published data. Data was
presented in pie charts and tables that failitated findings of the investigation which are described
and explained. The study discovered that market Risk Analysis, liquidity Risk Analysis, and
operational Risk Analysis all had an impact on the financial performance of Kericho Commercial
Bank. The study also found that Commercial Banks in Kericho had highly adopted Risk Analysis
practices to manage risk. As a result, the Risk Analysis practices comprising of understanding
risk, risk identification, risk analysis and assessment, and risk monitoring had a positive
correlation to the financial performance of Kericho Commercial Bank. The study recommends
that that Risk Analysis practices should be emphasized and utilized more effectively by Kericho
commercial banks.

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 CHAPTER ONE
INTRODUCTION
1.0 Introduction

In this chapter the following is presented: background of the study, statement of the problem,
objectives of the study, general objective, specific objectives, research questions, significance of
the study, justification of the study and the scope of the study in relation to the effects of
financial Risk Analysis on the financial performance of Kenya Commercial Bank.

1.1 Background of the Study

The term financial risk may be used like an umbrella term for multiple types of risk associated
with financing, i.e. financial transactions that include company loans in risk of default. Financial
risk arises from possible losses in financial markets due to movements in financial variables. It is
usually associated with leverage risk that obligations and liabilities cannot be met with current
assets. This study used the term financial risks to broadly cover market risk, operation risk and
liquidity risk. Arif and Showket (2015), Kornel (2020)and Fali et al. (2020); enriched the
description of risk by stating that financial risks is the probability of a firm collapsing when the
company uses debt to satisfy financial obligations. Financial risk may be caused by variation in
interest rates, currency exchange rates, variation in market prices, default risk and liquidity gap
that affect the cash flows and therefore its financial performance. Financial Risk Analysis can
therefore be defined as a set of financial activities that maximizes the performance of a bank by
reducing costs associated with the cash flow volatility.

Financial performance estimates how well a firm can create an incentive for the proprietors. It
can be estimated through various financial estimates for example; profit after assessment, Return
on assets (ROA), Return on equity (ROE), Earning per share (EPS) and any other market ratio
that is commonly acknowledged (Pandey 2015). Global crisis can affect the financial
performance of KCB for example the crisis that affected the global financial performance,
stability and economy in 2007-2018 reinforced the need to rethink some of the approaches
adopted by the financial community in assessing banks financial performance. Most of the KCB
outline liquidity risk, market risk and operational risk as the most important types of financial
risks they face. With the increasing trend of sudden corporate failure in both global and local

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context shareholders and other stakeholders are increasingly becoming more concerned with the
financial performance of their firm.

KCB’s core capital and includes disclosed reserves that appear on banks financial system and
equity capital. This money is the funds a bank uses to function on a regular basis of financial
institution strength. Bank supplementary capital where undisclosed reserves subordinates staffs
debts hybrid financial products and other items make up their funds. Tertiary capital which banks
hold to support their market risks, commodity risk, and foreign currency risk derived from
trading activities.

The banking industry is being controlled by the Central Bank of Kenya, the Banking Act, the
Companies Act and different guidelines issued by the CBK. Central Bank of Kenya manages the
activities and operations of all banks in the nation with the intention of facilitating advancement
and maintenance of a decent money related policy. Financial institutions face a few pressures
and changing conditions from increasing competition and changes in innovation. The institutions
need to concoct new services and financial items that must be created and sold effectively
(Osano, 2018). These new services and items can be created in the wake of changing the
business processes of the institutions through reengineering. Kenya Bankers Association fills in
as an entryway for the nearby banking industry. It tends to all issues that identify with the
banking industry. Commercial banks in Kenya assume a crucial job in the economic asset
allocation of a nation. The assets deposited by its clients are directed to investors. Hence, if
banks are profitable the investors yield high returns. This will support additional investment and
bring out economic stability.

1.2 Statement of the Problem

Financial risks have been a major problem to KCB in the current years. This stresses the need for
proper analysis and management of these risks for better financial performance. The potential
liquidity risk facing Kenya Commercial Bank is over-reliance in inadequate liquid assets hence
increase in interest rates on loans by the banks thus limiting the loan applicant number thus
lowering the financial performance of KCB. According to Ekinci (2016) and Namesake (2016)
market risk exposure is more unstable and can cause severe financial losses and possible closure
of commercial banks. Recently foreign exchange rate risk has grown due to; continuous

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expansion of foreign currency business, greater variability of exchange rates and increase in
foreign borrowing in the Kenyan banking sector. Continuous financial technological
development such as the introduction of mobile banking has contributed to increased fraudulent
activities resulting to reduction to banks assets and increase in its liabilities, it may call for crisis
of confidence among the banking public therefore impeding the going concern status of the bank
and ultimately may lead to bank failure.

Increase in non-performing loans in recent years has led to banks not reaching the financial
performance targets as planned hence the need of credit Risk Analysis. This study hence seeks to
establish the impact of analysing market risk on financial performance of KCB.

1.4 Objectives of the Study

i. To find out the financial risk analysis in place in kericho county

ii. To asses the level of project performance in commercial banks in Kericho county.
iii. To establish relationship between financial risk analysis and project performance in
Kericho County.

1.5 Research Questions

This study test’s the following:

i. What was the financial risk analysis in place in Kericho County.

ii. What was the level of project performance in commercial banks in Kericho County.
iii. What was the relationship between financial risk analysis and project performance in
Kericho County.

1.6 Justification of the Study

The government has a responsibility to ensure that public utilities for public benefits are well
protected. Risk analysis practices in commercial banks have proved to be a difficult procedure
for the public sector and even government itself. The study will equip the government with
relevant information that will enable it to make strict measures and policies that will help address
the challenges of financial risk analysis in commercial banks. This study will provide findings
and recommendations that will aid the government with possible suggestions to the financial risk
analysis in KCB.

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The study will also benefit the oversight boards, senior analysis and investors of financial
institutions in Kenya. The analysers in all commercial banks will clearly understand more on
impact of financial risk analysis on the financial performance and profitability of commercial
banks in Kenya. They will have the advantage of applying the recommendations made on the
study and engage the relevant stakeholder to determine whether to mitigate financial risk in a bid
to maximize returns. These research findings will help in addressing the existing knowledge gap
in literature of financial risk affecting financial performance of KCB.The results of this study
will form a reference point for future scholars studying financial risks on financial performance
of KCB.

1.7 Limitations of Study

 Over-reliance in inadequate liquid assets

 Market risk exposure is more unstable
 severe financial loses and possible closure of commercial banks
 Increase in fraud activities resulting to reduction in bank assets and its liabilities

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 CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This Chapter discusses theories and analysis of literature review relevant to the study, Providing
the reader with an account of the theoretical grounds of the research problem being studied. The
specific areas covered under this chapter are Theoretical review, Empirical review,
conceptualization and conceptual framework.

2.1 Empirical Review

It presents what other scholars have written about the factors affecting financial performance of
commercial banks, the variables, and methodology they used as well as their findings and
recommendations.

Among the threats faced by the banks, however, credit risk is considered to be the most critical
risk because large sums of bank earnings come from credit as a result of interest paid on credit
(Almekhlafi, et al., 2019). Credit risk is a risk resulting from the consumers' failure to pay back
their loans or the money they owe to the bank on time and in full (Adekunle, Alalade and
Agbatogun, 2019)

According to (Musah 2017) liquidity is a very important driver for bank profitability. This view
was also established by (Isaka, 2018) who found that profitability was directly proportional to
liquidity, in the sense that profits resultantly produce cash flow. Banks tend to perform poorly in
times when gross domestic product (GDP) growth is low, and financial performance is good
when GDP growth is high (Murerwa, 2017). There is a great demand for loans in favorable
times, since the standard of living improves. The banking sector contributes more than 20% of
the GDP in South Africa, where economic growth stabilizes the ability of borrowers to repay
debts (Ifeacho & Ngalawa, 2018)

(Chepkoech 2020) studied operational Risk Analysis and Micro Finance Institutions performance
in Nairobi County. The study sample was 261 employees drawn from selected Micro-Finance
Institutions in Nairobi County. The study adopted a multiple regression model to analyze the
study data. Empirical findings of the research indicated a significant positive impact operation
risk on the financial performance of MFIs in Nairobi County. However, the study was based on

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Micro Finance Institutions. The current study filled this gap by focusing on the commercial
banks in Kenya.

Bank loans as vital funds in an account with the reserve bank that is essentially used to
collectively satisfy inter-bank obligations as lender security (Edem,2017). In the banking
industry, high liquidity risk exists when clients unnecessarily withdraw cash from the banks.
This affects the possibilities of banking success antagonistically by putting back should be
consumers and banks manageable purchasers. As a result, the operation of banks decreases
dramatically and results in a vital income reduction (Ejoh, Okpa, and Egbe, 2019).

(Muriithi,2017) studied financial risk and profitability of commercial banks in Kenya. Using data
from a sample of 43 banks, the Pagan Lagrange multiplier (LM) and the Chow and Breusch tests
were applied to check the fixed effect model. Indicators of financial risk include market risk,
credit risk, liquidity risk and operational risk. Study findings indicated a significant negative
impact of credit risk on the profitability of commercial banks in Kenya.

(Lyambiko, 2017) conducted a study which was guided by two objectives; To determine the
operational risks management practices and financial performance in commercial banks in
Tanzania and to identify the sources of operational risks exposures among commercial banks in
Tanzania. The study adopted a descriptive research design a target population of 36 licensed
commercial banks as at 31st December 2017 with a sample of the 36 commercial banks being
analyzed. Secondary data was collected from the financial statements of commercial banks
between 2015 and 2019.A regression model was developed with bank performance being
measured by ROA and the independent variables consisting of credit risk, insolvency risk and
operational efficiency. The research findings established that the independent variables had
varying degrees of relationship with financial performance of commercial banks. The research
confirmed that operational efficiency was positively correlated with the financial performance of
commercial banks while credit risk and insolvency risk negatively influenced the financial
performance of commercial banks.

(Suganya and Kengatharan 2018) investigation resulted that operating risk and non-performing
loans ratio resulted in a negative whiles bank capital indicated a positive association. The
inability to handle operating risk in banks and mortgage lenders contributed to poorly reported
loans due to incorrect or inadequate creditworthiness appraisal of borrowers.

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2.1.1 Liquidity Risk Analysis

Central Bank of Kenya (2021) defines Liquidity as the ability of any financial institution to fund
Increase in its assets and at the same time meet its obligations on time without incurring
Undesirable losses. ALM and liquidity Risk Analysis are the procedures and techniques that a
bank use to guarantee that a balance sheet generates the required net interest margin while not
exposing the organization to excessive risks from interest rate volatility. Plan and structure a
balance sheet with an appropriate asset/liability mix in order to optimize the institution's
risk/return profile in the future and assess the institution's ability to meet its cash flow and
collateral needs (under both normal and stressed conditions) without negatively impacting day-
to-day operations or its overall financial position.
Measuring liquidity risk using liquidity ratios is not adequate and hence, banks need to develop a
new view of liquidity risk measurement. Based on the existing literature, most studies used
liquidity ratios as the measurement for liquidity risk. Primary measures of liquidity are net
working capital and the current ratio, quick ratio, and the cash ratio. By contrast, solvency ratios
measure the ability of a company to continue as a going concern, by measuring the ratio of its
long-term assets over long-term liabilities.
Companies with liquidity problems in most cases have insufficient cash to offset short term
financial obligations and to help in the Maximization of investment returns. Liquidity
performance optimizes financial Performance due to minimum cash-flow problems (Rehman,
Khan & Khokhar, 2015). Companies that are not liquid enough would therefore not have an
opportunity to optimize the use of the available current assets and liabilities.

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2.1.2 Market Risk Analysis

Market Risk Analysis is the ability to identify, measure, monitor and control exposure to market
risk. Market risk is the possibility that an individual or other entity will experience loses due to
factors that affect the overall performance of the investment in the financial market. Market risk
or systematic risk affects the performance of the overall market hence cannot be eliminated
through diversification. Sources of market risk include recessions, political turmoil, and changes
in interest rates, natural disaster and terrorist attack.
The most common types of market risk include interest rate risk, equity risk, commodity risk,
and currency risk. Interest rate risk covers the volatility that may accompany interest rate
fluctuations and is most relevant to fixed-income investments. Equity risk is the risk involved in
the changing prices of stock investments, and commodity risk covers the changing prices of
commodities such as crude oil and corn. Currency risk, or exchange-rate risk, arises from the
change in the price of one currency in relation to another. This may affect investors holding
assets in another country
A widely used measure of market risk is the value-at-risk (VaR) method. VaR modeling is a
statistical Risk Analysis method that quantifies a stock or portfolio's potential loss as well as the
probability of that potential loss occurring. While well-known, the VaR method requires certain
assumptions that limit its precision. Beta is another relevant risk metric, as it measures the
volatility or market risk of a security or portfolio in comparison to the market as a whole. It is
used in the capital asset pricing model (CAPM) to calculate the expected return of an asset.
Other studies have used different measures of market risk and control variables to analyze the
relationship between financial risk and financial performance (Murithi et al.2016)  
Market risk affect performance of commercial banks in that exchange risk, inflation and interest
rate risks has a negative impact on their performance. Degree of financial leverage, foreign
exchange rate exposure and interest rate risk are used as indicators of market risk hence most
changes which might happen within the economic environment or among the interest rate will
definitely have an extreme negative impact on profitability. Therefore, the higher the ratio is the
more the bank is risky since its relying on more debt. Mitigation of market risk can be achieved
through; diversification so as to handle concentration risk, tweaking your portfolio to mitigate
interest rate risk, hedging your portfolio against currency risk and finally going long term for
getting through volatility times.

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2.1.3 Operation Risk Analysis

Operational Risk Analysis is a continual cyclical process which includes risk assessment, risk
decision making and implementation of risk controls which results to mitigation of risk
According to (Basel II committee, 2017), Operational risks result from failed procedures,
systems or policies such as employee errors, systems failures, fraud or other criminal activity and
any event that disrupts business processes This definition includes legal risk, but excludes
strategic and reputational. Operational risk involves: Breakdown in internal controls which
results to business disruptions as the system failures arising from disruptions to hardware,
software or telecommunications failure cause Losses, poor corporate governance will result to a
negative agent principal relationship and overall poor financial performance of the commercial
banks and fraud heightens exposure to fraudulent activities can increase a bank’s exposure to
reputation and strategic risks due to operational Risk Analysis weaknesses.
It is necessary to understand operational risk and its effects on the financial performance of
commercial banks. (Luburic, 2016) Operational risk threatens the viability and long-term
sustainability of banks. Increase in losses borne by banks is as a result of inadequate operational
Risk Analysis practices. 
The basic indicator approach is a collection of operational risk measuring techniques established
under Basel II capital adequacy criteria for banking institutions to measure operational risk. All
financial institutions are required by Basel II to set aside capital for operational risk. 
As banking becomes more customer-centric and customers increasingly use digital channels,
banks can gain greater visibility into what their customers, employees and IT systems are doing
and better insights into what could go wrong through effective training of people. With
digitalization and straight-through processing, banks can reduce or eliminate human intervention
in many transactions, thus containing the risks of employee error. The less bureaucratic
organizations and agile ways of working in recent days, managers can recognize and respond
quickly to threats in order to improved financial performance of banks.

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2.1.4 Financial Performance

According to Ariff and showket (2015), financial risk refers to the possibility that shareholders
may lose their monies because of company’s use of debt where the company’s cash flow are in
sufficient to meet its financial obligations. Financial performance applies to the assessment of
overall financial health of a firm of a given time period while making comparison with other
players across the industry (Mirie, 2015). There are several determinants of financial
performance liquidity risks, equity price risks, firm size, capital structure, profitability, economic
conditions, corporate governance and firm characteristics and policies. The current study focused
on credit risk, liquidity risk, market risk and operational risk.
The study focused on the following to measure its financial performance: Return on Assets
(ROA), a profitability ratio which is measured by dividing net profit by the company’s average
assets. It’s an indicator of how well the company is managing its available resources and assets
to net higher profits. ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2.
Improper credit Risk Analysis reduce the bank profitability, affects the quality of its assets and
increase loan losses and non-performing loan which may eventually lead to financial distress.
The inability of a bank to satisfy its debts endangers its financial position or survival, which is
referred to as liquidity risk. Through proper Asset Liability Management, institutions control
their liquidity risk. It has the potential to have an impact on the whole financial ecosystem, as
well as the global economy. Market risk affects any firm that trades assets and liabilities. The
risk can surface because of changes in interest rates, exchange rates, or any other prices of
financial assets that are traded rather than held on the balance sheet.          

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2.2 Summary of Gaps identified from Reviewed Literature
Research gaps exist since none of the studies address in detail the effectiveness of financial Risk
Analysis practices on the financial performance of tier 1 commercial banks in Kenya. Most of
the literature reviewed indicates that the previous researchers only concentrated on market Risk
Analysis and liquidity Risk Analysis leaving out the component of operation Risk Analysis. The
study covered additional important variables of the mentioned financial Risk Analysis that were
omitted therefore making this study more comprehensive.
2.3 Theoretical Review
This section explains some of the more specific theories that can be related to the topic of study
on financial Risk Analysis and effect it has on financial performance of tier 1 commercial banks.

2.3.1 Modern Portfolio Theory

It was developed by Markowitz (1952). It gives an explanation on how to maximize expected

returns as well as how to minimize risks. This can be realized through careful choice of assets
making up the portfolio. According to Bodie, Kane and Marcus (2018), efficiency of a portfolio
is measured by the high level of returns for any amount of risk achieved by optimally
diversifying assets held by a company. It emphasizes that companies would reduce risk exposure
through holding optimal Portfolio that is considered as a sign of rational financial and investment
decision making. It would help the management of such companies to diversify Investments to
help reduce risks and improve financial performance for the big companies (Fatemi, Glaum &
Kaiser, 2017). The theory also helps to assess the use of risk-return trade-off Argument in the
analysis of rational investment decision making.

2.3.2 Agency Theory

It was propounded by Jensen and Meckling (1976) and Ross (1973). It states that an agency
relationship exists among parties in the governance of an enterprise. The owners would be the
principal while the management teams are the agents. The principal’s expectation is that agents
would help them in growing their capital and interests. In many cases however, agents make
decisions that serve their personal interest leading to an agency conflict. According to Panda and
Leepsa (2017), when the owners are separate from the management team, a possible conflict
would arise because of different risk profiles, different information held and moral hazards. The

11
theory is based on prepositions linking the owners of institutions as well as those in charge of
managing them (Mulwa, 2020). The theory gives an insight on how shareholders can protect
their investment through the use of independent auditors, monitoring of management decisions
and putting in place investment oversight to reduce financial risks when making investment
decisions (Hastori, Siregar, Sembel & Maulana, 2018). It helps in performance management
especially with respect to financial Risk Analysis. The assumption is that employees have
economic self-interest that requires to be monitored to reduce possible conflicts (Evans &
Tourish, 2018).

2.3.3 Risk Theory

Halling and Hayden (2020) contend that a bank should determine and evaluate its liquidity risk
in all its entire subsidiaries, branches, entities in its area of jurisdiction. The bank’s product mix
and its business, cash flow position, and off and on balance sheet obligations. Consequently,
banks should assess each main on and off-balance sheet position, together with the impact of
entrenched options alongside other exposures that may impact the bank’s uses and funds’
sources, and delve into how it can influence liquidity risk. Alshati (2018), brought to light the
fact that Banks are largely exposed to various types of risks attributable to liquidity management,
which affect the performance and activities of these banks. In line with the examination in
progress, institutions within the financial sector assess the interactions between liquidity risks
alongside other risks that they are liable to as a result of their nature of operations. These risks
span from operating and financial risks which include operational, interest rate, reputational,
credit, and legal risks as they influence the liquidity level of a bank. Liquidity risk sometimes
arises from the inability to manage other risks.

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 2.4 Conceptual Framework
The function is to refine goals, develop realistic and relevant research questions, select
appropriate methods, and identify potential validity threats to the conclusions. The research has
liquidity Risk Analysis, market Risk Analysis and the operational Risk Analysis
INDEPENDENT VARIABLES

Liquidity Risk Analysis

Liabilities
Deposits
Cashratio
Liquidity DEPENDENT VARIABLE

Market Risk Analysis

Depreciating currencies
Financial
Interest rate variation performance of
commercial banks
Commodity risk

Operation Risk Analysis

Breakdown in internal controls
Poor corporate governance
Fraud

Source (Researchers, 2022)

Conceptual Framework.

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 CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction

This chapter discusses the research design, target population, sampling technique, data collection
instruments, pilot study, data analysis and ethical consideration.

3.1 Research Design

Research design according to Durrheim (2004) is a strategic framework for action that serves as
a bridge between research questions and the execution or implementation of the research
strategy. This gives arrangement and structure of examination conveyed in order to acquire
answers to research questions. The study employed descriptive research design; according to
Shona McCombes (2020) a descriptive research is a process of collecting data in order to
describe the characteristic of the variables under the study without any manipulation. The choice
of the design is based on the need for accuracy and systematically description of population,
situation and phenomenon. The method offered the study a profile of described relevant aspects
of the phenomena of Risk Analysis practices in tier 1 commercial banks in Kenya.

3.2 Target Population           

The target population is a group of individuals from which the study seeks to conduct research in
and draw conclusion from. According to Ngechu (2004) a population is a well define set of
elements or people that possess common characteristics. The target population for the study was
9 tire 1 commercial banks in Kenya.

3.3 Sampling Technique

A sample is a way of selecting a portion of the population which adequately represents the entire
population (Chandran, 2004). Sampling is important for eliminating bias in the selection process
and also allow for the reduction of cost or effort in the gathering samples. Due to a manageable
size of the population the study used census method where it targeted all the 9 tier 1 banks using
the risk and compliance department. 

14
3.4 Data Collection Instrument 

Lescroel (2015), defined data collection as the process of gathering and measuring information
on the targeted population hence enabling the researcher to answer questions and analyses
findings. In order to get appropriate results, the study used both primary and secondary data. The
primary data for the study was collected using personally administered questionnaires to gather
information on financial Risk Analysis. The questionnaire was adapted from Khan and Ahmed
(2001) and Ariffin et al. (2018). The first section of the questionnaire was an introduction part to
the respondents. The other sections will gather information about market Risk Analysis, liquidity
Risk Analysis, credit Risk Analysis, operational Risk Analysis and financial performance
guidelines and strategies adopted by the tier1 commercial banks. The poll is intending to
comprise of 5 Likert scale point, 5 for affirmation of strongly agree, 4 for affirmation of agree, 3
for neutral, 2 for disagree and 1 for strongly disagree with the idea. The secondary data was
obtained from the CBK publications.

3.4.1 Questionnaire

The data collection process of this research began with a pilot test. According to Cooper and
Schindler (2003), a pilot test is conducted to identify weaknesses in questionnaire design and
instrumentation and to provide proxy data for the selection of a probability sample. Pilot test
involved the target population and the test was conducted in the same way as planned for the
final questionnaire. The main reason for conducting the pilot test was to identify problems with
the measurement items, questionnaire instructions, and the time required by the respondents to
complete the questionnaire. The respondents were contacted personally by phone to obtain
feedback as to whether the instructions and measurement items were unclear, confusing, or
redundant

3.4.2 Interview Guide

A test is seen as being reliable when it can be used by a number of different researchers under
stable conditions, with consistent results and the result not varying. (Maree and Fraser 2004) ask
how far the same test would produce the same results if it was administered to the same people
under the same conditions. This helps the researcher to make comparisons that are reliable, the
more errors found in an assessment the greater its unreliability. The study used a test re-test

15
technique to the same group of respondents who had been identified for this purpose. The
validity of instrument is the extent to which it does measure what it is supposed to measure.
According to Mugenda and Mugenda (1999), validity is the accuracy and meaningfulness of
inferences, which are based on the research results. It is the degree to which results obtained
from the analysis of the data actually represent the variables of the study. The research
instrument was validated in terms of content and face validity.

16
 CHAPTER FOUR
Data Analysis, Findings, Recommendations and Conclusions
4.0 Introduction
This chapter presented the patterns of the results and their analyses as to their relevance to the
objectives and hypotheses. The findings are presented in tables and narrations as per the specific
objectives. The chapter presents descriptive statistics, the pre-estimation and post-estimation
tests. The chapter further presents the results of the models that was adopted in order to achieve
the study’s objective

4.1 Data Analysis and Findings

The objective of this study was to investigate the effect of financial risk on financial performance
of commercial banks in Kericho. The study variables were Liquidity Risk, Market Risk and
Operational Risk on financial performance of commercial banks in Kericho. The pre-estimation
tests conducted on Normality test, Multi collinearity, Test for Fixed or Random Effects,
Wooldridge Test for Serial Correlation and Heteroscedasticity indicated that the underlying
assumptions were fit for regression analysis.

4.1.1 Data Analysis for Demographic Information

 Response rate
The study targeted 42 commercial Banks in Kenya. Out of the target population, only 30 banks
filled the questionnaires and returned representing a response rate of 71% which is within the
recommended rates as per Mugenda’s (2017) accepted significant response rate for statistical
data analysis which was established at a minimal of 50% as per the study. The commendable
response was realized after the researcher made effort to remind the respondents to fill in the
questionnaire and return. Out of the 30 banks which responded, 9% represented public banks,
21% foreign bank and 70% were local banks.

Table 4.1: Response rate

Commercial Bank Frequency Percentage
Public banks 21 70
Foreign banks 6 20

Local Banks 3 10

17
 Total 30 100

 Descriptive statistics
In the study, the risk management practices were analyzed as per risk procedures described in the
questionnaire. The mean and standard deviations of the variables under study were also analyzed
with an objective of examining the effects of risk administration practices on the performance of
commercial banks in Kericho. The figures are given in the table 4.2 below

Table 4.2: Descriptive statistics

Response rate
Risk management Practice (%) Mean % Mean STD deviation

Risk Management Environment 71 4.83 96 .379

Risk Measurement 71 4.83 96 .379

Risk Mitigation 71 4.66 92 .479

Risk Monitoring 71 4.50 90 .508

Adequate Internal Controls 71 4.33 87 .758

Capital Adequacy 71 2.83 57 1.23

Investment guidelines and strategies 71 4.50 90 .508

The table above shows the risk management practices with the mean score and the standard
deviations from the means of each of the data points collected from the 30 commercial banks. In
the table of risk management practices, risk measurement, risk management environment and
risk mitigation scored highly across all the banks under study. The standard deviations recorded
by risk management, risk measurement and risk mitigation were minimal showing and indication
that there was minimal variation in those risk management practices. The Capital adequacy
recorded a higher standard deviation indicating a higher variability between the 30 commercial
banks under study.

18
4.1.2 Financial risk analysis on commercial banks in Kericho

 Correlation Analysis of the Variables

The study conducted correlation analysis for the various variables that are liquidity risk, credit
risk, market risk and operational risk on financial performance of banks in order to examine the
nature of the statistical relationships between each pair of variables. Table 4.3 shows the
correlation matrix of all the variables included in the study.

Table 4.3: Correlation Analysis

Liquidity
ROA Risk Credit Risk Market Risk Operational Risk
ROA 1.000
Liquidity
Risk -0.716 1.000
0.000
Market
Risk -0.696 0.228 0.696 1.000
0.000 0.000 0.000
Operational
Risk -0.670 0.352 0.657 0.421 1.000
0.000 0.000 0.000 0.000

The results indicated that Liquidity Risk (r=-0.716, p-0.000) had a negative and significance
relationship on financial performance of the commercial banks. Market Risk (r=-0.696, 0.000)
had a negative and significance relationship on financial performance of the commercial banks.
Lastly, Operational Risk (r= -0.670, 0.000) had a negative and significance relationship on
financial performance of the commercial banks in Kericho. This indicates that an increase in
liquidity risk, credit risk, market risk and operational risk led to a decrease on financial
performance of the commercial banks in Kericho.

19
  Regression Analysis

The study sought to carry out regression analysis to establish the statistical significance
relationship between liquidity risk, credit risk, market risk and operational risk on financial
performance of commercial banks in Kericho. According to Chatterjee and Hadi (2017),
regression analysis is a statistical process of estimating the relationship among variables. It
includes many techniques for modeling and analyzing several variables, when the focus is on the
relationship between a dependent and one or more independent variables. The results presented
in Table 4.4

Table 4.4: Regression Analysis

ROA Coef. Std. Err. z P>|z|

Liquidity Risk -3.5221 1.3435 -2.6200 0.0090

Market Risk -2.6809 1.3349 -2.0100 0.0450
Operational Risk -1.7752 1.4010 -1.2700 0.2050
cons 5.1436 0.1910 26.9200 0.0000

chi2(4)= 179.22
Prob>chi2=0.0000
Within = 0.6306

The regression equation was as shown below;

Yit = 5.1436 - 3.5221X1it - 4.2020X2it -2.6809X3it

-1.7752X4it X1it = Operational Risk of bank i at time t

X2it = Credit Risk of bank i at time t

X3it = Market Risk of bank i at time t

X4it = Liquidity Risk of bank i at time t

20
The R squared of 0.6306 implied that the four risk namely liquidity risk, credit risk, market risk,
operational risk explained 63.06% on the variations on financial performance for the commercial
banks with the Nairobi Securities Exchange. The overall model was significant as indicated by
the Prob>chi2 of 0.000 with a Wald chi2 (4) of 179.22. In addition, the constant of 5.1436
showed that when liquidity risk, credit risk, market risk, operational risk are held constant,
performance will remain at 5.1436 units.

The results indicated that there was a negative and significant relationship between liquidity risk
and financial performance of commercial banks in Kericho (β= -3.5221, p=0.0090). Further, the
results indicated a negative and significant relationship between credit risk and financial
performance of commercial banks in Kericho (β=-4.2020, p=0.0010). Market risk had a negative
and significant relationship with financial performance of commercial banks in Kericho (β= -
2.6809, p=0.0450). Lastly, operational risk revealed a negative but insignificant relationship with
financial performance of commercial banks in Kenya (β= - 1.7752, p=0.2050). Further, the
negative and significant relationship between the variables liquidity risk, credit risk and market
risk on financial performance of banks depicted the desired outcome since they amount to the
key risk that banks encounter when conducting their lending operations.

4.1.3 Level of project performance in Commercial Banks

With any business initiative, there’s an expectation that performance is monitored and measured
to gauge return on investment and to determine if goals were achieved; business projects are no
exception. Since data drives many decisions today, you will likely be expected to measure
project performance with data. Here are some of the key ways to measure project performance
and the key performance indicators (KPIs) that really matter.
Before a project even begins, the goals for the project need to be determined. You need to
understand how project sponsors and key stakeholders will determine if the project is successful
and ensure everyone is on the same page. Project success can be measured in many ways
including if it was completed on time, on or under budget, if it resulted in more sales, improved
customer service or increased efficiencies, and a combination of these or other factors. It’s
imperative at the outset to decide for each project what good performance means and what
success looks like.

21
Once goals are determined you can gather baseline metrics to record the status of business at the
starting point of your project for just those things that are meaningful to your team and
stakeholders. It’s essential to know where you started out to provide accurate performance
metrics and to know when the project finished how your business was impacted.
As at 31 December 2018 the financial performance aspects of commercial banks as well as
financial risks management in Kenya was guided by the CBK prudential guidelines issued in
January 2017. Commercial banks in Kenya were required by CBK to submit audited annual
reports which include their financial performance and in addition disclose various financial risks
in the reports including credit risk, interest rate risk, foreign exchange risk, liquidity risk as well
as capital management risk on a yearly basis by 31 March of every year. The Kenyan banking
sector registered improved performance in 2017 by registering a 15.9 percent growth in total net
assets from Ksh. 2.33 trillion in December 2014 to Ksh. 2.70 trillion in December 2017. (Source:
Central Bank of Kenya).
The Central Bank of Kenya (CBK) said that more than 90% of banks in the country reported loss
reduction due to increase in risk management and most reported that there was increased risk
awareness in the institutions. In a survey of banks and mortgage institutions in Kenya, the CBK
contacted 43 significant institutions to assess the adequacy and impact of risk management
guidelines the central bank had issued in 2005. The development of risk management as an
autonomous function in particular has been rapid, with 95% of institutions surveyed saying they
had created “independent and wellfunded risk management functions.

4.1.4 The relationship between financial risk analysis and project performance
The global financial crisis showed bank regulations importance in hedging against higher risks
due to banks’ imbalance. Stulz (2018) suggested that there exists five methods that systems in
financial risk management breaks down, as learnt from the major global crisis and other minor
ones: risks miss-measurement, use of inappropriate risk metrics; not taking risks already known
into account; not communicating risks to the management; failure to monitor and manage risks.
Central Bank Supervision Report, 2018 indicates that many banks that collapsed in Kenya in the
late 1990’s were as a result of the poor management of credit risks which was portrayed in the
high levels of nonperforming loans. It is important therefore to study how banks are managing
the broader financial risk.

22
4.1.5 Findings of the study
 Operation Risk and financial performance
Operational risk focuses on how things are accomplished within an organization and not
necessarily what is produced or inherent within an industry. These risks are often associated with
active decisions relating to how the organization functions and what it prioritizes. While the risks
are not guaranteed to result in failure, lower production, or higher overall costs, they are seen as
higher or lower depending on various internal management decisions. (Troy Segal, 2020)
Because it reflects man-made procedures and thinking processes, operational risk can be
summarized as a human risk; it is the risk of business operations failing due to human error. It
changes from industry to industry and is an important consideration to make when looking at
potential investment decisions. Industries with lower human interaction are likely to have lower
operational risk.
Operational risk was found to be negatively but insignificantly related to financial performance
of commercial banks in Kenya. The null hypothesis was therefore not rejected. Thus the study
found that market risk has no significant effect on the financial performance of commercial
banks in Kenya. The descriptive statistics indicated that the capital charge to gross income was
favorable for most banks for their operations.
 Market Risk and financial performance

Because the risk affects the entire market, it cannot be diversified in order to be mitigated but can
be hedged for minimal exposure. As a result, investors may fail to earn expected returns despite
the rigorous application of fundamental and technical analysis on the particular investment
option. (CFI Team, 2022)

Volatility, or the absolute/percentage dispersion in prices, is often considered a good measure for
market risk. Professional analysts also tend to use methods like Value at Risk (VaR) modeling to
identify potential losses via statistical risk management. (CFI Team, 2022)
The VaR method is a standard method for the evaluation of market risk. VaR technique is a risk
management method that involves the use of statistics that quantifies a stock or portfolio’s
prospective loss, as well as the probability of that loss occurring. Although it is widely utilized,
the VaR method requires some assumptions that limit its accuracy. (CFI Team, 2022)

23
The beta coefficient enables an investor to measure how volatile the nature or market risk of a
portfolio or security is, in comparison to the rest of the market. It also uses the capital asset
pricing model (CAPM) to calculate the anticipated return of an asset. (CFI Team, 2022)

Market risk was found to be negatively and significantly related to financial performance of
commercial banks in Kenya. The null hypothesis was therefore rejected that market risk has no
significant effect on the financial performance of commercial banks in Kenya. The descriptive
statistics indicated that the banks had maintained the risk sensitive assets to liabilities at a higher
ratio to mitigate the market risk.

 Liquidity Risk and financial performance

In summary, liquidity risk was found to be negatively and significantly related to financial
performance of commercial banks in Kenya. The null hypothesis was therefore rejected that
liquidity risk has no significant effect on the financial performance of commercial banks in
Kenya. The descriptive statistics indicated that most of the banks had adequate liquidity to cover
loans in the event of an economic downturn resulting in loan defaults. Thus the total loans to
total deposit were well maintained for most of the commercial banks in Kericho.

4.2 Recommendations
The following recommendations were made based on the findings of the study.

 Liquidity Risk and Financial Performance of Commercial Banks

The study recommended that the managers of the banks should divest the excess cash in
productive and capital generating assets. This makes sure that they are not holing excess cash at
the expense of the fixed assets that can be used to increase profits. Therefore, the managers
should often reevaluate their capacity to raise funds and also monitor factors closely so as to
ensure that sound liquidity. Banks managers must possess a regulatory structure to permit them
make assessments of banks' liquidity risk administration as well as competence of their liquidity,
in both normal times as well as time periods of stress and anxiety

 Credit Risk and Financial Performance of Commercial Banks

24
The study recommended that the managers of the bank to adopt the policies that will ensure
debtors ratios does not increase at high ratios in relation to the total capital since this amounts to
credit risk. The managers should minimize the credit risk by ensuring the credit worthiness of the
clients is critically evaluated with collateral. Therefore, the managers should be vigilant when
making the credit policies so that they do not end up negatively impacting the performance of the
banks. The study recommends on the lending policies should outline the allocation and scope of
credit facilities by establishing the limits which could be based on group authority that allow
committees to approve large loans. Also the frequency of committee meetings and reporting
procedures should be specified, Managers require understanding how credit policy affects the
banks performance to be able to ensure proper utilization of banks deposits as improper
management of credit risk will increase the non-performing loans this may result in to financial
distress.

 Market Risk and Financial Performance of Commercial Banks

Market risk for commercial banks in Kenya had a negative relationship with performance. This
signals to bank managers that a decrease in market risk implies increase in performance this can
be achieved by organization monitoring all open positions arising from bank activities. Banks
should establish financial risk early warning mechanism so that managers can take effective real
time comprehensive management to reflect banks financial position including financial structure,
profitability and asset utilization to enhance efficiency. This will stop risk events just before they
mature.

 Policy Recommendations

On policy recommendations, the study recommends that bank managers should often reevaluate
their capacity to raise funds and also monitor factors closely so as to ensure that sound liquidity.
The managers should minimize the credit risk by ensuring the credit worthiness of the clients is
critically evaluated with collateral and also risk appraisal committees formed to evaluate risk
before any loan disbursements.

4.3 Conclusions

25
Based on the study findings the study concluded that there is a strong correlation between
liquidity risk, market risk and operational risk on financial performance of commercial banks in
Kericho.

The study concluded that relationship between liquidity risk and financial performance of
commercial banks was strong and statistically significant. In addition, the study found that most
of the banks had adequate liquidity to cover loans in the event of an economic downturn
resulting in loan defaults. The study concluded that relationship between credit risk and financial
performance of commercial banks was strong and statistically significant. Further, the study
concluded that relationship between market risk and financial performance of commercial banks
was strong and statistically significant.

In addition, majority of the commercial banks had maintained the risk sensitive assets to
liabilities at a higher ratio to mitigate the market risk. The market risk face the banks due to the
unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks
are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Lastly, the study concluded that operational risk had an effect on the financial performance of the
commercial banks although the effect was not statistically significant. The study found that the
capital charge to gross income was favorable for most banks for their operations. These
operational risk includes the uncertainties and hazards commercial banks faces when they
attempt to do their day-to-day business activities.

26
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 APPENDICES
APENDIX I: QUESTIONNAIRE
This questionnaire is intended to provide information for the study on the effect of risk

management on the financial performance of commercial banks in Kenya. Please note that the

information provided will be used for academic purpose only and will be treated with utmost

confidentiality.

Kindly answer the following questions by ticking (x) in the appropriate box or by giving the

necessary details in the spaces provided

TABLE 1. Risk Management Environment, Policies and Procedures

ITEM 1 2 3 4 5
1. A formal risk management system is in place
2.Board of directors outlines the overall objectives
3. Overall objectives are communicated to the management and
staff
4. Board of directors approves the overall policies of the
institution
5. Board of directors ensures that management takes
necessary actions in risk management.
6. Internal guidelines are in place to govern the institution
7. The bank adopts and utilizes guidelines internally
generated and by regulatory authorities such as CBK.

8. The Bank has adopted and utilized Revised CBK Financial

Risk management Guidelines

9. There is a budgetary allocation to the risk management

function.
10. Take Human factors such as human error in place.
12.Ris department is an integral part of the organization processes

31
13. Anonymous risk reporting channel e.g. Each team
member should have the possibility to report risks that he/she
foresees in the project.

14. Head of risk department reports directly to the board.

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

TABLE 2. Risk Mitigation

ITEM 1 2 3 4 5
1.There are credit limits for individual counterparty
2. The bank regularly reappraises collateral (assets)
3. The bank regularly confirms a guarantor’s intention to
guarantee their financing with a signed document
4. There is analysis and report writing committee on the
credit rating of the prospective investors.
5. The bank regularly conducts simulation analysis and
measure benchmark (interest) rate risk sensitivity.
6. There are Derivatives instruments to mitigate financial
risk.
7. There is credit rating of prospective investor by pre-
visiting desk analysis of data and information collected
from the client.
8. There is credit rating of prospective investor by checking
if there are no factual errors or misinterpretations of data
provided by prospective investors.
9. Presence of a permanent risk officer responsible for the
organizations risk mitigation procedures.

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

TABLE 3. Risk Monitoring

ITEM 1 2 3 4 5
1. The credit limits for individual counterparty is strongly
monitored by doing background check.
2. The bank regularly (e.g. weekly) compiles a maturity
ladder chart according to settlement date and monitor cash

32
position gap

3. The bank has in place a regular reporting system

regarding risk management for senior officers and
management
4. The bank regularly reviews country ratings if their
financing or investments are international
5. The bank regularly monitors the customer’s business
performance after the extension of their financing by
checking on the bank statements.
6. The credit limits for individual counterparty are set and
monitored strictly
7. The bank regularly monitors the customer’s business
performance after the extension of their financing by
checking on the audited financial statements.
8. Maintaining live project risk database. Each risk should
have the following attributes: opening date, title, short
description, probability and importance
9. Risks in the institution are ranked in the order of
magnitude and frequency.
10. Risks in the institution are prioritized.
11. Ongoing feedback communicated to the stakeholders on
the risks management.
Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree
TABLE 4. Internal Control

ITEM 1 2 3 4 5

1.Principles and procedures relating to decision making

processes

2. Segregation of duties in different approvals levels in the

all documents processed by the banks e.g. loan approvals

33
3. The bank has countermeasures (contingency plan) against
disaster and accidents

4. The internal auditor is responsible to review and verify

the risk management systems, guidelines and risk reports

5. The bank has backups of software and data files in a

different location from the banks office.

6.The bank has backups of software and data files

7. There is a Risk Committee in the Board Level

responsible for approval of audit plans.

8. system controls to detect any fraud transactions

9.Existence of personnel policy on guiding on frauds

transactions

10.The bank personnel are able to tailor a method to fit a

precedent situation

11.The risk personnel ensure that the risk response is

followed consistently throughout the organization

12. Testing, auditing and assessments of bank procedures

are performed by independent personnel. Eg external
auditors.

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13. Internal auditors report directly to the head of Internal
audit at Board level

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

TABLE5. Risk Measurement

ITEM 1 2 3 4 5

1. There is a computerized support system for estimating

the variability of earnings and risk management

2. The bank regularly conducts simulation analysis and

measure benchmark (interest) rate risk sensitivity.

3.The bank uses Duration Analysis

4.The bank uses Maturity Matching Analysis

5. The bank uses Estimates of Worst Case scenarios/stress

testing for risk analysis.)

6.The bank has a quantitative support system for assessing

customers’ credit standing

7.The bank use Risk Adjusted Rate of Return on Capital

(RAROC)

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8.Adequate quality management processes

9.Adequate record keeping processes( electronic and

Manual files)

10. Adequate internal audit processes( internal auditors

have authority to audit all processes)

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

TABLE 6. Capital Adequacy

ITEM 1 2 3 4 5

1.The Bank has forecastable and easily analyzed liquidity

2.The Bank has strategies for continued funding

3.The Bank has ,counterparty of standard cash management

4.There standard reports on liquid assets

5.Standard reports on open lines of credit

6.There daily analysis of fund demands

7.Reports on self-supporting in times of cash h crisis

8. Presence of liquidity needs in times of specific bank

shocks.

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9 Capital adequacy measured by use of Capital adequacy
Ratio( CAR)

10. Bank has both tier one and tier two capital

11. The banks perform a risk weighting for all its assets.

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

TABLE7. Investment guidelines and Strategies

ITEM 1 2 3 4 5

1.Existence of guidelines plan for the investment project

undertaken

2. Due diligence of the investment opportunities undertaken

by the Bank.

3. The bank considers volatility of the investment projects

undertaken.

4.There is an investment committee in all the investment

projects undertaken by the Bank

5. There is analysis of costs and risks in all investment

decisions.

6. Investments are closely monitored to note any deviations.

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7.strategies are outlined in terms of concentrations and

commitments to particular areas of the market

Note: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5=Strongly Agree

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