Moreover, this study also introduces bank size as appropriate moderating variable and alsoemployment of GMM making the methodology more superior from prior studies. Said et al.,(2008); Awojobi (2011) and Al Karim et al., (2013) studied the effect of bank size onfinancial performance of banks where their results are contradicting. Bank size as amoderating variable has hitherto not been addressed in the previous studies done in Kenya.Therefore, there was a need to investigate the moderating effect of bank size on financial riskand the financial performance of commercial banks in Kenya.1.3 Research Objectives1.3.1 General ObjectiveTo establish the effect of financial risk on financial performance of commercial banks inKenya1.3.2 Specific Objectives1. To examine the effect of credit risk on the financial performance of Commercial Banks inNairobi C.B.D 2. To establish the effect of liquidity risk on the financial performance of Commercial Banksin Nairobi C.B.D3. To examine the effect of market risk on the financial performance of Commercial Banks inNairobi C.B.D4. To determine the effect of operational risks on the financial performance of CommercialBanks in Nairobi C.B.D17
1.4 Research Questions1. How does credit risk affect the performance of commercial banks in Kenya?2. How does liquidity risk affect the performance of commercial banks in Kenya?3. How does market risk affect the performance of commercial banks in Kenya?4. How does operational risk affect the performance of commercial banks in Kenya?1.5 Significance of Study1.5.1 Financial InstitutionsThe study will generate findings that are important to financial institutions because they willbe able to understand general financial risks and how they influence the financialperformance of the banks and how the same can be leveraged to achieve high financialperformance.1.5.2Bank Operational Staff and ManagementThe findings of the study will be important to the bank operational staff and managementwho will be able to understand the risk management practices that contribute to financialperformance of commercial banks and ensure that they undertake acceptable bankingpractices and procedures and will also facilitate bank customers to understand and appreciaterisk management practices instituted by banks so as to adhere to prudential banking practices.1.5.3 Central BankThe findings will assist Central Bank of Kenya in formulating guidelines that will reduce andcontrol financial risks in the banking sector. Central Bank is concerned on knowing whichbanks operate successfully or failed to take necessary measures so as to avoid the crises ofbankruptcy in these banks.1.5.4 ManagersThe managers in all commercial banks will clearly understand more on impact of financialrisk on the financial performance of commercial banks in Kenya. They will have the18
advantage of applying the recommendations made on the study and engage the relevantstakeholder to determine whether to mitigate financial risk in a bid to maximize returns.