THE EFFECT OF FINANCIAL RISK MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA BY JOEL GITHINJI WANJOHI A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE MASTER OF SCIENCE IN FINANCE DEGREE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI

...................................................................................................................... iv LIST OF ABBREVIATIONS ........................................................................................... ix LIST OF TABLES .............................................................................................................. x CHAPTER ONE: INTRODUCTION .............................................................................. 1 1.1 Background to the Study ............................................................................................. 1 1.1.1 Financial Risk Management ................................................................................. 3 1.1.2 Financial Performance .......................................................................................... 6 1.1.3 Effects of Financial Risk Management on Financial Performance ................... 8 1.1.4 Commercial Banks in Kenya ................................................................................ 9 1.2 Research Problem ....................................................................................................... 10 1.3 Research Objective ..................................................................................................... 12 1.4 Value of the Study ...................................................................................................... 12 CHAPTER TWO: LITERATURE REVIEW ............................................................... 13 2.


Background to the Study
In the epicenter of the modern financial theory we have paramount ideas that are relevant for managers planning risk management strategies. One such overriding idea is that investors require higher returns to take on higher levels of risk. Investors therefore require risk premium for the risk that they can't eliminate through diversification. Risktaking is therefore an inherent element of banking and, indeed, profits are in part the reward for successful risk taking in business. Risk may be often referred as the systematic or unsystematic risk. Systematic risk also referred as un-diversifiable risk or market risk is the risk that is inherent to the entire market or market segment. Unsystematic risk also known as diversifiable risk is the risk which is specific to a firm. Diversifiable risk can be managed through appropriate diversification.
The term financial risk may be used like an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Jorion and Khoury (1996) say that financial risk arises from possible losses in financial markets due to movements in financial variables. It is usually associated with leverage with the risk that obligations and liabilities cannot be met with current assets. Our focus in this study will use the term financial risks to broadly cover credit risk, market (price) risk, interest rate risk, liquidity risk and foreign exchange risk.
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, 2 therefore its financial performance and competitive position in product markets. Indeed most of the Kenyan Commercial banks outline credit risk, liquidity risk, market risk, interest rate risk and foreign exchange risk as the most important types of financial risks they face. The Basel committee defines credit risk as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with the agreed terms.
Liquidity Risk arises due to insufficient liquidity for normal operating requirements reducing the ability of banks to meet its liabilities when they fall due. BCBS (2000) defines Foreign exchange (FX) settlement risk as the risk of loss when a bank in a foreign exchange transaction pays the currency it sold but does not receive the currency it bought. FX settlement failures can arise from counterparty default, operational problems, market liquidity constraints and other factors. Market risk is the risk originating in instruments and assets traded in well-defined markets.
Financial Risk management 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. The manager's behavior toward risk (risk appetite and risk aversion) and corporate governance can affect the choice of risk management activities. Iqbal and Mirakhor (2007) notes that a robust risk management framework can help banks to reduce their exposure to risks, and enhance their ability to compete in the market. Today, banks financial risk management is one of the most important key functions in banking operations as commercial banks are in the risk business. Al-Tamimi and Al-Mazrooei (2007) notes that in today's dynamic environment, all banks are exposed to a large number of risks such as credit risk, liquidity risk, foreign exchange risk, market risk and interest rate risk, among othersthe risks which may create some source of threat for a bank's survival and success. Diffu (2011) notes that the crisis that affected global financial stability and the economy in 2007-09 has reinforced the need to rethink some of the approaches adopted by the financial community in assessing bank performance. To this end, it is important to obtain a comprehensive view of the key factors that may influence banks' performance, including the adequacy of business models in relation to risk appetite, and the question of how this adequacy is handled inside and outside banks through governance processes.
Against this backdrop, appropriate benchmarks, sensitivity analyses as well as stress tests ought to be considered in order to assess the real capability of banks to face stressed market conditions and absorb consecutive shocks on the basis of their business strategy and degree of risk tolerance. On this study looked at the extent to which the Bank's financial performance was affected by the management of the financial risks.

Financial Risk Management
Managing financial risk involves setting appropriate risk environment, identifying and measuring the banks risk exposure, mitigating risk exposure, monitoring risk and constructing controls for protecting the bank from financial risk. BCBS (2001) defines financial risk management as a sequence of four (4) processes: (1) the identification of events into one or more broad categories of market, credit, operational and other risks into specific sub-categories; (2) the assessment of risks using data and risk model; (3) the monitoring and reporting of the risk assessments on a timely basis; and (4) the control of 4 these risks by senior management. Because of the vast diversity in risk that banking institutions take, there is no single risk management guidelines for banking institutions prescribed risk management system that works for all.Each banking institution should tailor its risk management program to its needs and circumstances. However, given the critical role of banks for a modern market economy, the opacity of banks' balance sheets, the dispersion of banks' creditorstypically many small depositorsand the maturity transformation banks perform converting short-term deposits into medium-to long-term assets there is need for regulations in the banks. To this end banking has therefore historically been one of the most regulated sectors, with regulation ranging from licensing requirements to on-going supervision to a bank-specific failure regime and deposit insurance. Some of the regulations include the Basel I Accord, Basel II Accord, Basel III Accord as well as local regulations in Kenya banking sector.
The board and the senior management of the bank are responsible for creating the appropriate risk management environment. These include maintaining a risk management review process, appropriate limits on risk taking, adequate systems of risk measurement, a comprehensive reporting system, and effective internal controls. Procedures should include appropriate approval processes and limits and mechanisms designed to assure the bank's risk management objectives are achieved. In order to properly manage risks, an institution must recognize and understand risks that may arise from both existing and new business initiatives; for example, risks inherent in lending activity include credit, liquidity, interest rate and operational risks. Risk identification should be a continuing process, and should be understood at both the transaction and portfolio levels. Risk 5 identification is the basic step of risk management. This step reveals and determines the potential risks which are highly occurring and other events which occur very frequently.
Risk is investigated by looking at the activity of organizations in all directions and attempting to introduce the new exposure which will arise in the future from changing the internal and external environment. Tcankova (2002)  Monitoring and review is an essential and integral step in the risk management process.
Risk needs to be monitored to ensure the changing environment does not alter risk priorities and to ensure the risk management process is effective both in design and in operation. The organization should review at least on an annual basis.
Financial risk management has become a booming industry starting '90 as a result of the increasing volatility of financial markets, financial innovations (financial derivatives), the growing role played by the financial products in the process of financial intermediation, and important financial losses suffered by the companies without risk management systems (for example, Enron and WorldCom), Gheorghe and Gabriel (2008). Shafiq and Nasr (2010) also notes that Risk Management as commonly perceived does not mean to minimize risk; in fact, its goal is to optimize the risk-reward trade off. And, the role of risk management is to assure that an institution does not have any need to engage in a business that unnecessarily imposes risk upon it. Talel (2010) notes that risk management is still evolving in Kenya and therefore many institutions lack adequate information on effective risk management methodologies.

Financial Performance
Financial performance is the measuring of bank's policy and operations in monetary form. It also shows a bank's overall financial health over a period of time, and it helps to compare different banks across the banking industry at the same time. In his study 7 Toutou (2011) defined financial performance as a general measure of how well a bank generates revenues from its capital. Suka (2010)  ROE = (result/turnover)*(turnover/total assets)*(total assets/equity).
The first element is the net profit margin, the second element represents the efficiency of the assets and the last corresponds to the financial leverage multiplier. ROE reflects how effectively a bank management is using shareholders' funds. Thus, it can be deduced from the above statement that the better the ROE the more effective the management in utilizing the shareholders capital.

Effects of Financial Risk Management on Financial Performance
Efficient financial risk management is required in any organization as return and risk are directly related to each other meaning that increase in one will subsequently increase the other and vice versa. Fatemi and Fooladi (2006) notes that effective risk management 9 leads to more balanced trade-off between risk and reward, to realize a better position in the future. Shafiq and Nasr (2010) notes that the banking industry recognizes that an institution needs not do business in a manner that unnecessarily imposes risk upon it; nor should it absorb risk that can be efficiently transferred to other participants. Rather, it should only manage risks at the firm level that are more efficiently managed there than by the market itself or by their owners in their own portfolios. In short, it should accept only those risks that are uniquely a part of the bank's array of services.
Financial risk caused by variation in interest rates, currency exchange rates; default and poor liquidity management may have negative effects on the bottom-line of the bank. Athanasoglou et al. (2005) notes that bank risk taking has some effects on bank profits (Performance) as indicated by total assets, total deposit, net interest, margin and net income. Also Bobakovia (2003) notes that the profitability of a bank depends on its ability to foresee monitor and avoid risks, and possibility of provisions to cover losses brought about by risk that arises. Bikker & Metzmakers (2005) notes that the ultimate objective of risk management implementation is to maintain financial performance in the banking sector as aspects of financial risk management promote early warning system of monitoring relevant indicators; as well as stimulating and making provisions for possible realistic strains on the system by conducting stress testing.

Commercial Banks in Kenya
Commercial banks are financial intermediary institutions that take deposits and gives credit amongst other financial services. In Kenya, the banking sector plays a dominant role in the financial sector, particularly with respect to mobilization of savings and provision of credit. As per Bank Supervision Annual Report (

Research Problem
This subsection covers the conceptual discussion, contextual discussion and research studies on financial risk management and financial performance in commercial banks leading to the research question.
Commercial banks adopt different risk management practices majorly determined by; ownership of the banks (privately owned, foreign owned, publicly owned), risk policies of banks, banks regulatory environment and the caliber of management of the banks.
Banks may however have the best financial risk management policies but may not necessarily record high financial performance. In additional although the Central Bank of Kenya issues regulating guidelines on financial risk management, risk management in banks may have different characteristics. Looking at the emphasis that is laid on financial risk management by commercial banks in their financial statements, the level of contribution of this factor to financial performance need not to be underestimated.
The recent global financial crisis revealed the importance of bank regulations to hedge against high risks attributed to imbalances in banks' balance. René Stulz (2008)

Research Objective
To establish the effect of financial risk management on the financial performance of the commercial banks in Kenya.

Value of the Study
The study will contribute to the evolution of the important subject of financial risk management. Specifically, the study will explain the extent to which theoretical risk models such Value at Risk(VAR) are used by banks to measure the risks.
The study will provide insight in the most successful strategies banks use to handle financial risk. The findings of the study will assist Central Bank of Kenya in formulating guidelines that will enhance financial risk management in the banking sector. The study will also be important to the commercial banks that will be able to understand the risk management practices that contribute to financial performance of commercial banks and ensure that they undertake acceptable banking practices and procedures.
Academicians will benefit from the information of the study as the study will contribute to existing body of knowledge. The study will further provide the background information to research organizations and scholars and identify gaps in the current research for further research.

Introduction
This Chapter presents a review of literature related to the theme of the study; the first sub-section introduces theoretical review relating to risk management practises. The second sub-section is an overview of related empirical researches. Sub-section three looks at determinants of financial performance in banks.

Theoretical Literature Review
The section covers three most applicable theories of risk management. Subsection one will introduce the Modern Portfolio Theory. The other two subsection will cover the Moral Hazard Theory and Merton's Default risk Model.

Modern Portfolio Theory (MPT)
Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. According to CAPM, all investors should hold the market portfolio, leveraged or deleveraged with positions in the risk-free asset. CAPM also introduced beta and relates an asset's expected return to its beta.
Portfolio theory provides a context for understanding the interactions of systematic risk and reward. It has shaped how institutional portfolios are managed and motivated the use of passive investment techniques. The mathematics of portfolio theory is used in financial risk management and was a theoretical precursor for today's value-at-risk measures. 15

Moral Hazard Theory
A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first. For example one might take risks that someone else will have to bear. Moral hazards such as these are a pervasive and inevitable feature of the financial system and of the economy more generally. Krugman (2009) described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly." The inadequate control of moral hazards often leads to socially excessive risk-takingand excessive risk-taking was certainly a recurring theme in the recent global financial crisis. In the subprime scandal, the would-be borrower didn't have much chance of getting a mortgage. However, banks originated mortgages with a view to selling it on (i.e., securitizing it), this incentive was seriously weakened. In fact, when the bank sold on the mortgage to another party it had no interest in whether the mortgage defaulted or not, and was only concerned with the payment it would get for originating the loan. The originating bank was now happy to lend to almost anyone, and it ended up in the patently unsound situation where mortgages were being granted with little or no concern about the risks involved. The subprime scandal was merely illustrative of a much broader and deeper problem-namely, that moral hazard in the financial sector has simply been out of control.
Wolf (2008) aptly put it, no other industry but finance "has a comparable talent for privatizing gains and socializing losses. Instead of "creating value," as we were repeatedly assured, the practices of financial engineering (including structured finance and alternative risk transfer), huge leverage, aggressive accounting and dodgy credit rating have enabled their practitioners to extract value on a massive scale-to walk away with the loot, not to put too fine a point on it-while being unconstrained by risk management, corporate governance, and financial regulation, all of which have proven to be virtually useless. Financial bailouts of lending institutions by governments, central banks or other institutions can encourage risky lending in the future if those that take the risks come to believe that they will not have to carry the full burden of potential losses.

Merton's Default Risk Model
The quantitative modeling of credit risk initiated by Merton (1974) shows how the probability of company default can be inferred from the market valuation of companies.
The original Merton model was based on some simplifying assumptions about the structure of the typical firm's finances. The event of default was determined by the market value of the firm's assets in conjunction with the liability structure of the firm.
When the value of the assets falls below a certain threshold (the default point), the firm is considered to be in default. A critical assumption is that the event of default can only take place at the maturity of the debt when the repayment is due. Many theoretical studies suggested models that relax some of the restrictive assumptions in the Merton model.

Determinants of Banks Financial Performance
The financial performance of commercial banks can be determined by either internal factors or external factors. Internal factors could be bank specific determinants while external factors are Industry specific determinants and Macroeconomic determinants.
Bank specific indicators include: growth in bank assets, capital adequacy, operational efficiency, and liquidity. Industry specific factors include: ownership, bank size, bank concentration index. While on the other hand, the key macroeconomic variables include: growth in GDP, GDP-per-capita, inflation expectation, interest rate and its spread.

Empirical Literature Review
Studies on the relationship between risk management and financial performance of banks mostly have been conceptual in nature, often drawing the theoretical link between good risk management practices and improved bank performance.
Al-Tamimi and Al-Mazrooei (2007)   Primary data through close ended questions was collected in this study on the financial risk management practices employed and their influence on the financial performance of the commercial banks.
Data was analyzed using correlation analysis and regression models with the strength of the model being tested using Cronbach's Co-efficient Alpha. The study found that most commercial banks had highly adopted financial risk management practices to manage financial and credit risk and as a result the financial risk management practices mentioned herein have a positive correlation to the financial performance of commercial banks of Kenya. The study recommended that commercial banks should seek and obtain information consistently so as to permit them to detect potential problems at an early stage and identify trends not only for particular institutions, but also for the banking system as a whole, while also ensuring transparency of banking activities and the risks inherent in those activities, including credit risk.

Summary of Literature Review
From this chapter the financial risk management in the banking sector cannot be understated. Risk management is nowadays considered as a key activity for all 26 companies. Many of the disastrous losses through the bank crisis would have been avoided if good risk management practices have been in place. All the previous studies established that banks should have proper risk management function and better risk management techniques so as to lead to better financial performance.

Introduction
This chapter describes the methodology that was adopted to achieve the research objectives of the study. The first subsection covers research design. Subsection two covers the unit of analysis followed by the data collection methods. Lastly we look at how data was analysed.

Research Design
The research used a descriptive research design. Descriptive survey research portrays an accurate profile of persons, events, or account of the characteristics, for example behaviour, opinions, abilities, beliefs, and knowledge of a particular individual, situation or group (Burns and Grove 2003). The descriptive survey method was preferred because it would ensure complete description of the situation (in depth study of financial risk management), making sure that there was minimum bias in the collection of data.

Population
Target population refers to the entire group of individuals or objects from which the study seeks to generalize its findings. The target population comprised of the forty three (43) commercial banks and one Mortgage Company making it 44 Banks as per appendix I.
The study was a census study.

Data Collection
The study used both primary data and secondary data. The purpose of using primary source data was to get respondents' perception towards the risk management practices 28 followed by the commercial banks in Kenya. The primary data for this study was collected using personally administered questionnaires. See Appendix I. The questionnaire was adapted from Khan and Ahmed (2001) and Ariffin et al. (2009).The questionnaire consisted of six sections. The first section was designed to gather the institutional information. The second section was designed to gather information about the risk management environment. The other sections gathered information about risk measurement followed by risk monitoring, risk mitigation and internal control techniques adopted by the commercial banks. The questionnaire was designed to consist of 5 likert scale point, 5 for strongly agree, 4 for agree, 3 for no opinion, 2 for disagree and 1 for strongly disagree. The secondary data was collected from the various CBK Bank Supervision Annual Reports. The five years (2008-2012) annual ROA ratio was averaged to form the dependent variable (financial performance).

Data Validity & Reliability
A pilot study was carried out to pre-test and validate the questionnaire. To establish the validity of the research instrument the opinions of risk experts in the banking sector was sought. This facilitated the necessary revision and modification of the research instrument thereby enhancing validity. A pilot group of 5 individuals from the target population was done to test the reliability of the research instrument. The pilot data was not included in the actual study. The pilot study allowed for pre-testing of the research instrument. The clarity of the instrument items to the respondents was established so as to enhance the instrument's validity and reliability. The pilot study assisted in being familiar with research and its administration procedure as well as identifying items that require 29 modification. The results helped to correct inconsistencies arising from the instruments, which ensured that they measured what was intended.

Data Analysis
Descriptive statistics was used to describe the data and examine the relationships between the variables under investigation. Descriptive statistics used included Frequency distributions, measures of central tendency (mean and standard deviation), and pie charts that described the data.
Inferential statistics was used to examine the casual relationships between the financial risk management and the banks financial performance. An F-test was used to assess how well the set of independent variables, as a group, explains the variation in the dependent variable/ effectiveness of the model as a whole in explaining the dependent variable. We used a t-test to assess the significance of the individual regression parameters/assessing whether the individual coefficients were statistically significant. We tested for multicollinearity (two or more independent variables in a multiple regression model are highly correlated) using formal detection-tolerance or the variance inflation factor (VIF).
All the above analysis was done through Statistical Package for the Social Sciences -SPSS.

Model Specification
The study utilised the regression analysis with the equation of the form. The model provided a statistical technique for estimating the relationship between the financial risk management and the financial performance of the banks.
Y=α+b 1 X 1 +b 2 X 2 +b 3 X 3 +b 4 X 4 +b 5 X 5 +ε Where: α =constant/the interception point of the regression line and the y-axis b 1 , b 2 …..b 5 are the coefficients of the independent variables that will be determined.
Y=Financial performance measured by the simple average ROA (2008-2012) X 1 = Risk Management Environment.
X 5 = Adequate Internal Control. ε = disturbance term or error term The independent variables X1, X2…… X5 were operationalized and measured using the questions posted in the questionnaire. The variables were measured as follows:  The results of financial performance for the banks were presented in a table and a brief explanation was given. To measure the effects of financial risk management on the financial performance, regression analysis was carried out as well as correlation analysis.

Operationalization of the Study Variables
The chapter concludes with a brief interpretation of the findings.

Response Rate
Of the total 44 banks targeted, 32 banks responded to the questionnaires, representing a response rate of 73% which is within Mugenda and Mugenda's (2003) prescribed significant response rate for statistical analysis which they established at a minimal value of 50%. This commendable response rate was made possible after the researcher personally administered the questionnaire and made further visits to remind the respondents to fill-in and return the questionnaires as well as constant telephone reminders. The pie chart below presents the ownership profile of the banks in the study.
As shown in the pie chart, 60% of the respondents were local banks, 31% were foreign banks and 9% were public owned banks.

Financial Risk Management Practices in Kenyan Banks
To assess the level of financial risk management practices in the Kenyan commercial banks by using the descriptive tests, the study used the 5-Likert scale approach in the questionnaire. The higher the scale indicated that the respondent strongly agreed to such practices adopted by their banks. Financial risk management practices were covered in

Risk Management Environment
With regard to "Risk Management Environment", the results as in Your Bank has adopted and utilised Revised CBK Prudential Guidelines. guidelines from the CBK. Lastly, item, "There is a budgetary allocation to the risk management function" also scored a low mean depicting that majority of the respondents had no opinion on whether there was specific budget allocation to risk management function. This may be an indication that risk management sections are not taken as cost centres or that they are aggregated with other cost centres.

Risk Measurement
Moving on to the risk measurement practices, as shown in Table 4.3,only three items statement scored a mean of 4, that is the respondents agreed on the items statement. The item statements were; the bank regularly conducts simulation analysis and measure benchmark (interest) rate risk sensitivity; the bank uses Maturity Matching Analysis and item statement; the bank uses Estimates of Worst Case scenarios/stress testing for risk analysis. This is an indication that the risk measurements techniques are still developing in the Kenyan banks.
Value at Risk analysis , Risk Adjusted Rate of Return on Capital (RAROC) were not common measurements of risk in the Kenyan Banks as they scored a mean of 2 which showed that majority of the respondents were not aware of the techniques. Majority of the banks also confirmed that there were no internal risk rating systems as well as computerized support system for estimating the variability of earnings and risk management. These areas may need improvement in order to assist the bank in managing the risks efficiently.  Table 4.4 presents the perception on risk mitigation practices in Kenyan banks. For risk mitigation practices, majority of item statements scored a mean 3.5-4.3 which are considered good. However, item; "there are derivatives instruments to mitigate financial risk" scored a mean of 1.4 meaning majority of the respondents did not agree that Kenyan banks use derivative instruments to mitigate financial risk. This area may need improvement in order to assist the banks in managing the risks efficiently. There are mark-up rates on assets set taking account of the risk factors or asset grading. 32 1.00 5.00 3.8750 .79312

Risk Mitigation
The bank regularly (weekly) compiles a maturity ladder chart according to settlement date and monitor cash position gaps. 32 1.00 5.00 3.5000 .87988 The bank regularly conducts simulation analysis and measure benchmark (interest) rate risk sensitivity. 32 2.00 5.00 4.0000 .87988 The bank has a quantitative support system for assessing customers' credit standing 32 1.00 5.00 3.7812 1.09939 There is credit rating of prospective investors. 32 3.00 5.00 4.2500 .76200 Valid N (listwise) 32 39 Table 4.5 on the frequency of generating risk reports indicate that majority of the banks generates monthly risk reports. This can as well be classified as good risk management technique.

Source; Research Findings
Moving on to the risk monitoring practices, as shown in Table 4.6,all the items statement scored a mean of 3.5-4.6. This is a good indication of risk management.

Adequate Internal Control
As per Table 4.7, for internal control practices, the respondents strongly agreed in all items. This can be considered as good practice.  for each year take into account the number of institutions that were in operation in each of the years.

Regression and Correlation Analysis
Correlation Coefficients and regression analysis was used to analyse the effects between the financial risk management and financial performance.

Correlation Coefficient
As a key assumption of regression model, the study sought to establish whether there was linearity between independent and dependent variables. Pearson correlation was used to analyse the correlations between the variables and financial performance. Table 1 reveals the correlation coefficients between the variables and financial performance. Internal Controls and financial performance of 0.536. The coefficient matrix reveals a strong relationship between the dependent factor (financial performance) and the independent factors (financial risk management).

Source; Research Findings
The study also used Durbin Watson (DW) test to check that the residuals of the models were not auto correlated. Being that the DW statistics were close to the prescribed value of 2.0 for residual independence, it can be noted that there was no autocorrelation.

Multicollinearity Test
The study conducted formal detection tolerance and the variance inflation factor (VIF) for multicollinearity. For tolerance, value less than 0.1 suggest multicollinearity while values of VIF that exceed 10 are often regarded as indicating multicollinearity Table 4.13 shows that the values of tolerance were greater than 0.1 and those of VIF were less than 10. This shows lack of multicollinearity among independent variables. It would be in appropriate, therefore, to omit variables with insignificant regression coefficients.

Regression Model
The regression equation was of the form: Y=α+b 1 X 1 +b 2 X 2 +b 3 X 3 +b 4 X 4 +b 5 X 5 +ε Where: α =constant/the interception point of the regression line and the y-axis b 1 , b 2 …..b 5 are the coefficients of the independent variables that will be determined.

Source; Research Findings
The model means that financial performance is highly dependent on the level of the financial risk management. The t-test indicates that the financial performance is highly dependent of risk measurement practices and risk mitigation practises. 48

Interpretation of Findings
The study found that there was a significant relationship between the financial risk management practices on the financial performance of commercial banks. In general,

Introduction
The purpose of this chapter was to discuss and draw conclusions and recommendations on the findings of the main objective of the study which was to examine the effects of financial risk management on financial performance on commercial banks in Kenya. The chapter will also discuss further areas of study.

Summary
This study used primary data and secondary data to examine the effect of financial risk management practices in Kenyan banks on the financial performance of these Kenyan banks using correlation analysis and regression analysis. All the banks in the study practice good risk management with few areas of improvements. This includes the use of

Conclusions
The study established that financial risk management had a strong impact on the financial performance of commercial banks in Kenya. The study also established that the risk measurement practice had the biggest impact on financial performance followed by risk mitigation practice. Thus, as each shilling invested in risk measurement techniques and risk mitigation techniques increases revenues generation and the financial performance of banks increases. 52

Recommendation for Policy
From the finding and basing on the objectives, the study recommends the following; Kenyan banks should expound their risk measurements techniques so as to adequately manage the financial risks resulting from the increased financial innovations in the banking sector. Also the banking institution should explore the use of derivatives to mitigate the financial asset risks. Commercial banks should also check their risk management policy and practices and streamline them with global standards such as the Basel III accords. On budget allocation the banks should ensure risk management sections have a stand-alone budget to ensure resources are availed for the ever changing risk environment.
By this they would efficiently manage the financial risk and consequently increase their financial performance.

Limitations of the study
A limitation for the purpose of this research was regarded as a factor that was present and contributed to the researcher getting either inadequate information or responses or if otherwise the response given would have been totally different from what the researcher expected.
The main limitations of this study were that some respondents refused to fill in the questionnaires and some respondents decided to withhold information which they considered sensitive and classified. This reduced the probability of reaching a more conclusive study.

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In addition, most respondents were busy during the time of the survey as they were busy filing the monthly CBK compliance reports. This may have prevented the researcher to seek clarification from the respondents on areas of ambiguity.
Lastly, due to time and financial constraints the researcher did not carry out any interviews on the actual effect that financial risk management has had on the financial performance of the Commercial Banks. This could have limited the data available to the researcher since all the findings were based on questionnaires and the researcher's personal knowledge of the region under study.

Areas for Further Research
The study suggests that a further study can be done on the effects of financial risk management by use of detailed questionnaire on the financial performance of other financial institutions like the micro finance institutions (MFIs) and development financial institutions (DFIs).
Further research may be directed towards the examination of how Kenyan banks have adopted the Basel III recommendations and how such recommendations have affected their financial risk management and the financial performance.
Lastly, a study may be directed towards causal relationship between bank Capital and profitability for the Kenyan banks.