Evaluation of Operational Risk Management Practice and Financial Performance of Commercial Banks in Kenya

Commercial banks in Kenya have been facing financial performance challenges. This is reflected in the fluctuating financial performance demonstrated by various performance indicators. For instance, Kenya’s banking sector’s profit before tax dropped by an 8.8% margin to Ksh. 219.2 billion in the FY ending December 31, 2023, from Ksh. 240.4 billion reported in the preceding year (CBK, 2023). Out of the 38 commercial banks and one mortgage firm, only 11 institutions posted a strong performance rating under the CAMEL rating system employed by the CBK. This study was conducted to determine the effect of operational risk management practice on financial performance. The theory of enterprise risk management and the economic value-added model anchored the study. A cross-sectional survey research design was adopted. The study employed a deductive approach and quantitative research methods. All 38 licensed commercial banks in Kenya constituted the unit of analysis. The accessible population included heads of finance, credit, compliance, operations, and marketing. A census design was adopted to obtain the respondents who constituted the unit of observation. A structured questionnaire and a data collection sheet were used to collect primary and secondary data, respectively. The Statistical Package for Social Sciences was utilized to assist in analyzing the data using descriptive and inferential statistics. Operational risk management practice exhibited a positive correlation with financial performance. The effect of operational risk management on financial performance was statistically significant at p-value = 0.05 (t = 31.2; p = 0.000 < 0.05). The study concluded that operational risk management practice was crucial to the financial performance of Kenya’s commercial banks. It was recommended that banks develop policies that effectively guide operational risk identification, assessment, and management.