Price Risk and Financial Performance of Commercial Banks in Kenya

Abstract

Commercial banks globally and locally face chronic volatility in financial performance, largely driven by inadequate risk pricing and management. While banks serve a pivotal role in allocating resources and boosting the broader economy, their profitability is frequently hindered by non-performing assets, fluctuating price rates, and an inability to accurately match the cost of capital with the default probability of borrowers. As a result, many institutions experience fluctuating returns on assets. This study sought to determine the effect of price risk on the financial performance of commercial banks in Kenya. The study adopted a positivist research philosophy with an explanatory research design. Secondary data was collected from 38 commercial banks over the period 2014-2023. A statistically significant negative association between price risk and the financial performance of commercial banks was established. In addition, random effect model results depicted a statistically significant negative relationship between price risk and financial performance of commercial banks in Kenya (β=-0.00691, p<.05). It was concluded that price risk adversely affects the financial performance of commercial banks. It is recommended that commercial banks in Kenya strengthen their price risk management frameworks by adopting more advanced risk-based pricing models that accurately align loan pricing with borrower default probabilities and changing market conditions. Banks should enhance the use of derivatives and other hedging instruments to mitigate exposure to interest rate fluctuations, while also improving credit risk assessment systems to reduce non-performing assets.