Effect of ownership structure on the relationship between risk management practices and financial performance of financial institutions in Kenya

Abstract

Risk management is an important aspect of corporate practice, which has occupied an important place in the agenda of practitioners, academics and the business world.The impact of global financial crisis has highlighted the importance of risk management as the most challenging tasks that financial institutions face. Despite the extensive research on the subject little attention has been given on the possible interaction between ownership structure, risk management practices and its impact on firm performance. The general objective of this study was to establish the effect of ownership structure on the relationship between risk management practices and financial performance of financial institutions in Kenya. The specific objectives were to determine the effect of risk identification, risk analysis, risk evaluation and risk monitoring on firm performance and the moderating role of ownership structure on the relationship between risk identification, risk analysis, risk evaluation and risk monitoring on performance of financial institutions. The study was based on Agency theory and Enterprise risk management (ERM) theory. The study used explanatory research design. Stratified random sampling was used to select managers from commercial banks, Micro Finance institutions (MFIs) and SACCOs. A sample size of 239 respondents was obtained. Data was collected using questionnaires. Descriptive and inferential statistics such as Pearson product moment correlation and multiple regressions was used. The results of the study showed that risk evaluation (β=0.711), risk monitoring (β=0.091) and ownership structure (=0.232) had positive and significant effect on performance of financial institutions. The risk identification (β=0.026) and risk analysis (β=0.084), were not significant. The results on interaction effects showed that ownership structure moderated the relationship between risk analysis (β=0.155), evaluation (β=0.255) and performance of financial institutions (p<0.05). However, ownership structure does not significantly moderate the relationship between risk identification (β= -0.003), monitoring (β=-0.052) (P>0.05), and performance of financial institutions. The ownership identification is antagonistic on the relationship between risk identification, risk monitoring and financial performance. The ownership identity enhanced the relationship between risk analysis and risk evaluation on financial performance. The management of financial institutions should put in place risk management systems that will assist in identification and monitoring of risks with respect to their ownership identity. The study recommends to policy makers should use ownership identity to enhance the relationship between risk management practices and performance of financial institutions.