A COMPARATIVE STUDY AMONG LIQUIDITY RISK, CREDIT RISK AND INTEREST RATE RISK ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS

ABSTRACT Regardless developed or developing, banking sector serves as the spine of the economy of a country. Financial risks played a major role in the global banking crisis which occurred in the past decades. After which financial risks remained a major topic of interest globally. The aim of the study was to establish a comparative study among liquidity risk, credit risk and interest rate risk on financial performance of commercial banks listed in Rwanda Stock Exchange. The study was underpinned on financial distress theory, interest rate parity theory, stewardship theory and shiftability theory. Descriptive research design is used in the study. Target population of the study constituted all the banks listed in Rwanda Stock Exchange. Random panel technique for panel data based on period of 2009 to 2018 was key. Data was analyzed through multiple linear regression analysis. Credit risk amongst the sub variables was highly influenced by financial performance which reported a t-value of -5.382 hence the most significant. As contribution to knowledge. It employed both E-views and SPSS software for analysis, which are unique software’s. The results of the study revealed that all three risks had a significant effect on financial performance of commercial banks listed in Rwanda Stock Exchange. Conclusion: Out of all the risks considered, interest rate risk had a positive effect on financial performance whereas liquidity risk, and credit risk had a negative effect on financial performance. However, credit risk amongst the sub variables was highly influenced by financial performance which reported a t-value of -5.382 hence the most significant. This was followed by interest rate risk and liquidity risk with t values of 2.711 and -2.525 respectively. Recommendation: The result inferred that credit risk amongst the sub variables was highly influenced by financial performance. Hence the recommendation is that commercial banks should continuously formulate measures that enable them to give special attention to credit risk management and interest rate risk tackling, without denying the intermediation among deposits and loans since any neglect in these will in turn affect the financial performance of commercial banks. Keywords: Liquidity risk, Credit risk, Interest rate risk, Financial Performance, Data Panel.