Background to the study


The concept of risk management started long way back after the world war two, Eichhorn (2004) pointed out that issues in risk management was not of concern to many institutions and no training on the preparedness of certain eventuality. The aspect of pure risk management become prominent when engineers developed operational and technological model of managing risks which later came to be adopted by commercial banks and financial institutions regulator in the market. Risk management is continuously an evolving as well as a valued practice. In the recent years where the universe has been faced by financial crisis, the significance of a well formulated risk management strategy and process have increased in the financial institutions. According to Saunders (2006), risk is defined as uncertainty of outcome, whether positive opportunity or negative threat of actions and events. The risk has robe assessed in respect of the combination of the likelihood of something happening and the impact which arises if it does actually happen. Risk is defined as something that can create or generate hindrances to the achievement of certain objectives Afshien (2010). From Emmett (1997) definition, it is clear that risk is a condition of the real world: it crafts from an undesirable event. Undesirable event in this context is described as an adverse deviation from a desired outcome that is expected and hoped for.

Risk management is considered as a separate managerial function aimed at mitigating any potential losses and enhance firm value. In 2005 the Central Bank of Kenya and the treasury realized the importance of risk management to the commercial banks and offered a treasury circular meant to set enterprise risk management to all banks. This is to assure the members of their protection and promote management effectively deal with future uncertainties and associated risks (CBK, 2010).


Treasury Risk is termed as the risk that is connected with organization of an enterprise’s holdings including money market instruments all the way to equities trading (Van Greuning, & Brajovic-Bratanovic, (2009). With regards to financial arbitrage, treasury risks could lead to profit in the instance that arbitrage is correct and if it is incorrect then a loss is incurred. The risk management ought to be aimed at benefitting the organisation where it adds value at all the levels, otherwise it is not maximizing its value.

Risk Management has emanated to be a valued practice and from a simple, insurance based view to a holistic; all risk encompassing view commonly termed Enterprise Risk Management (Nocco and Stultz, 2006). In market based countries where capital market dominated by economic activities, banks have suffered a severe shock in their capital and liquidity status due to the unanticipated waves in the financial market and a credit crunch experience in the financial industry (Kargi, 2011). Experience has shown that treasury obligations fulfill an important part in an organization‘s operations. Notwithstanding at times it can be an area due to its nature and complexity that does not receive sufficient attention.

According to Bessis & O’Kelly (2015), the policy designed to achieve a major risks include passing on to another party, avoiding the risk, minimizing the negative effects of


the risk and absorb some or all of the consequences of a particular risk. Risk management should put value to your company at all levels. Financial risks are a significant part of every organization‘s financial operation large or small, public or private (Bessis, & O’Kelly, 2015).

Financial performance is a company‘s ability to generate or create resources from the daily operations, over a given period of time; performance is gauged by net income and cash from operations. A bank is a financial institution that provides financial services including issuing money, receiving deposits, lending money and processing transactions and providing credit (Campbell, 1993). Financial performance consists of methods to assess how good an organization is using its assets to generate income (Richard 2009). Common examples of financial performance are operating income, earnings before interest and taxes, and net assets value. It is of importance to note that no single measure of financial performance should be considered stand alone. The two most popular measures of profitability are ROE and ROA. ROE measures accounting earning for a period per dollar of Equity from shareholders while ROA measures return of cash that is invested in assets (Damodaran, 2007).

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