Financial Risk Management, Bank Size and Commercial Banks Profitability in Kenya

Purpose of the Study: This study examined the effect of financial risk management on profitability of Kenyan commercial banks, incorporating bank size as a moderating variable. It focused on credit, liquidity, interest rate, and foreign exchange risks, addressing inconsistent empirical findings and persistent profitability challenges within Kenya’s banking sector despite existing regulatory frameworks and oversight. Methodology: A quantitative research design using panel data was applied, covering eleven commercial banks in Kenya from 2018 to 2024. Secondary data were extracted from audited financial statements and analyzed using a random effects regression model. Interaction terms were included to test the moderating role of bank size on profitability relationships. Findings: The findings revealed that credit risk management has a positive and statistically significant effect on profitability at the 10% level, indicating that improved handling of non-performing loans enhances returns. Bank size was also positively significant at the 5% level, suggesting that larger banks benefit from economies of scale and stronger financial performance. However, liquidity risk, interest rate risk, and foreign exchange risk showed no statistically significant influence on profitability. Additionally, bank size demonstrated limited moderating effects, with only a weak interaction observed in the relationship between credit risk and profitability, while other interactions remained insignificant. Conclusion: The study concludes that effective credit risk management and increased bank size are key drivers of profitability in Kenyan commercial banks. Other financial risks have limited direct impact. Strengthening credit risk practices and supporting asset growth are essential strategies, while future research should incorporate broader variables and evolving financial sector dynamics.