EFFECT OF RISK MANAGEMENT PRACTICESON FINANCIAL PERFORMANCE OF COMMERCIAL STATE CORPORATIONS IN KENYA: A CASE OF JOMO KENYATTA FOUNDATION
DOI:
https://doi.org/10.47604/ijfa.741Keywords:
Risk Management Practices, Financial Performance, Commercial State Corporations and Jomo Kenyatta FoundationAbstract
Purpose: Risk if not well managed could lead to dissatisfactory performance of most organizations. Risk management should be at the central part of an organization's operations by integrating risk management practices into Systems, processes, and culture of the entire organization. This study sought to establish the effect of Risk management practices on financial performance of Commercial state corporations in Kenya, a case of JKF.
Methodology: The study adopted a descriptive study. The total population of the study was the employees of JKF. According to 2014/2015 Kenya National Audit office report, there are 119 employees of JKF. The study used secondary data which was collected from published reports and audited financial statements for five years for periods between 2011 and 2016. The collected data was analyzed using descriptive and inferential statistics. The study adopted regression analysis and statistical significance was measured at the 5% level of significance. R2 was used to determine strength of the relationship of the variables under study.
Results: The study found significant relationships between financial performance of commercial state corporations and operational, financial and strategic risk management practices to an extent of 98.7%, 92.7% and 87.4% respectively. The findings indicate that there is a fairly strong positive relationship between reputational risk management practices and financial performance to an extent of 56.2%. Efficient management of operational risks leads to lower operating expense and increased profitability. Practices that lead to general reduction of liabilities would positively affect firm's financial performance.
Unique contribution to Theory, Practice and Policy: The study recommended that state corporations should comprehensively implement risk management good practices as outlined in their "MWONGOZO" guidelines. Further it was recommended that future studies should be carried out to include all state corporations based on data from a longer duration.
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References
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Adhiambo, A. A., &Memba, M. S. (2012). Credit Cards and Performance of Commercial Banks Portfolio in Kenya. International Journal of Arts and Commerce, 1(6): 167 -173.
Chandana (2016, October 21).Tackling Financial Risk in everyday life. Retrieved from
https://www.simplilearn.com/tackling-financial-risks-in-everyday-life-article
Chakravarthy, J., deHaan, E., &Rajgopal, S. (2014): Reputation Repair After a Serious Restatement. The Accounting Review, 89 (4): 1329-1363.https://doi.org/10.2308/accr-50716
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Deloitte (2012).Global Survey on reputation risk. Retrieved February,26 2018 from https://www2.deloitte.com/content/dam/Deloitte/za/Documents/risk/NEWReputationRiskSurveyReport_25FEB.pdf
Deloitte (2014).Exploring strategic Risk. South African Context. Retrieved March, 20 2018 from https://www2.deloitte.com/content/dam/Deloitte/za/Documents/finance/ZA_ Strategic RiskSurvey_06052014.pdf
Deloite (2015).Exploring strategic Risk. RetrievedMarch,19 2018 from https://www2.deloittecom/content/dam/Deloitte/global/Documents/Governance-Risk-Compliance/dttl-grc-exploring-strategic-risk.pdf
Donaldson, T. & Preston, L.E. (1995).The Stakeholder Theory of Corporation: Concepts, Evidence and Implication. Academy of Management Review, 20(1) https://doi.org/10.5465/amr.1995.9503271992
Edwards, J.D. (n.d). Accounting principles. A business perspective. Retrieved June 20, 2018 from https://courses.lumenlearning.com/tcc-managacct/chapter/introduction-to-budgeting-and-budgeting-processes/
Eleftheriadis, I. &Vyattas, V. (2018).Risk and performance in Public Sector.10.1007/978-3-319-31816-5_3453-1
Elly, D.O. (2012).Executive compensation and Firm Financial performance. A critical Literature Review. Retrieved from http://hdl.handle.net/11295/39259
Eshna, (2017, August 9).Financial risks and its types. Retrieved from https://www.simplilearn.com/financial-risk-and-types-rar131-article
Fabozzi, F.J., Gupta,F. & Markowitz, H.M. (2003). The legacy of Modern portfolio theory.
Journal of investing.Vol.11 (3) 7 - 22. https://doi.org/10.2469/dig.v33.n2.1273
Fassin, Y. (2008). Imperfections and shortcomings of the stakeholder model's Graphical representation. Journal of Business Ethics.Vol.80(4) Pg.879-888. https://doi.org/10.1007 /s10551 -007-9474-5
Gatzert, N.(2015). The impact of corporate reputation and reputation damaging events on financial performance. Empherical evidence from literature, 33(2015) 485 - 499. http://www.elsevier.com/locate/emj
Gossy, G. (2008). A Stakeholder Rationale for Risk Management: Implications for Corporate Finance Decisions. Retrieved from https://books.google.co.ke/books/about/A_ Stakeholder_Rationale_for_Risk_Managem.html?id=dsxsHS9cJMQC&redir_esc=y
Gupta, P. (2011). Risk Management in Indian Companies: Enterprise-Wide Risk Management Journal of Risk Finance, 121-139
Institute of Operational Risk (2010).Operational Risk Management - Key Concepts. Retrieved August 3, 2017 from http://riskarticles.com/operational-risk-management-key-concepts/
Jones, I.W., & Pollitt, M.G. (2002a). Who Influences Debates in Business Ethics? An Investigation into the Development of Corporate Governance in the UK since 1990. In I. W. Jones and M. G. Pollitt (eds), Understanding How Issues in Business Ethics Develop. Basingstoke: Palgrave.
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J&W Associates. (2011).Cash and Liquidity management. Retrieved August 9, 2017 from https://ctmfile.com/sections/background/cash-liquidity-management
Kaplan, R.S. & Mikes, A. (2012).Managing Risks; A new framework. Retrieved from https://hbr.org/2012/06/managing-risks-a-new-framework
Khrawish, H.A (2011).Determinants of Commercial Bank performance .Evidence from Jordan.International Research Journal of Finance and Economies.Zarga University 5(5) 19 - 4
Kimotho, G.W. (2015). Relationship between Enterprise risk management practices and the
Financial performance among Commercial state corporations in Kenya. Retrieved
http://erepository.uonbi.ac.ke/handle/11295/94898
Kossovsky, N. (2014, April 1). How to manage Reputation Risk. Retrieved from
http://www.rmmagazine.com/2014/04/01/how-to-manage-reputation-risk
Krause, T.A, Tse, Y. (2016). Risk Management and firm value: Recent theory and
evidence. International Journal of Accounting and information management, 24(1); 56 - 81.www.emeraldinsight.com/1834-7649.htm
Lam, J.(2016).Strategic Risk management. Optimizing the Risk return profile.Retrieved March 20, 2018 from https://www.imanet.org/insights-and-trends/risk--management/strategic-risk- management?ssopc=1
Lee, L.F.,Hutton, A.&Shu, S. (2014). The role of social media in the capital market;Evidence from Consumer product Recalls. Retrieved from http://studylib.net/doc/8697208/the-role-of-social-media-in-the-capital-market
Markowitz, H. (1952). Portfolio Selection, Journal of Finance 7 (1), 77-91. http://www.jstor.org/about/terms.html
Maverick, J.B. (2018).What are major categories of financial risk for a company; Retrieved March 1,2018 from https://www.investopedia.com/ask/answers/062415/what-are-major-categories-financial-risk-company.asp
Modigliani, F. & Miller, M.H. (1958). The Cost of Capital, Corporate Finance and the Theory of Investment, American Economic Survey, 48(3) 261-297.http://www.jstor.org/stable/ 1809766?origin=JSTOR-pdf
Mozumdar, A. (2001). Corporate Hedging and Speculative Incentives: Implications for
Swap Market Default Risk. Journal of Financial and Quantitative Analysis, 36(2), 221-250.https://doi.org/10.2307/2676272
Njuguna, J., Gakure, R., Waititu, A., &Katuse, P. (2013). Effects of financial risk management on the growth of microfinance sector in Kenya, Prime Journal of Business Administration and Management (BAM), 3(6): 1064-1069,http://hdl.handle.net/11732 / 732
Nyang'aya, J. (2012). Enterprise Risk Management Survey Report: Where Do you Stand? Retrieved from https://docuri.com/download/deloitte-ers-report-201259c1eb f3f581710 b286e3c97_pdf
Odoyo, F. S., Omwomo, G. A., &Okinyi, N. O. (2014). An Analysis of the Role of Internal Audit in Implementing Risk Management: A case Study of State Corporations in Kenya.International Journal of Business and Social Science, 5(6): 169 - 176.Retrieved from https://ijbssnet.com/journals/vol_5_no_6_may_2014/18.pdf
Olsson, R. (2008). Risk Management in a Multi-Project Environment: An Approach to Manage Portfolio Risks.International Journal of Quality & Reliability Management, 25 (1), 60-71. https://doi.org/10.1108/02656710810843586
Oluwagbemiga, O.E, Idode, P. &Ogungbade, O. (2016). The relationship between risk management practices and financial performance of Nigerian listed banks. Accounting and management Information systems, 15, 565 - 587. Retrieved from http://www.cig.ase.ro/articles/15_3_6.pdf
Omasate, C.A. (2014).The effect of Risk Management on Financial performance of Insurance Companies in Kenya. Retrieved from http://hdl.handle.net/11295/74732
Omondi, H.A.(2017).Effect of Reputational management strategies on performance of oil marketing companies in Kenya. Retrieved from http://erepository.uonbi.ac.ke/bitstream/handle/11295/102948/HELLEN%20ADHIAMBO%20OMONDI_FINAL%20MBA%20PROJECT%20DOCUMENT.pdf?sequence=1&isAllowed=y
Peavler, R.(2018, May 20).The return on investment Ratio explained. Retrieved from https://www.thebalance.com/return-on-investment-ratio-393206
Pendo, M., Muturi, W. &Mogwambo, V. (2016). Influence of financial risk management practices on the performance of commercial banks operating in Migori County, Kenya. International Journal of Social Sciences and Information Technology.Vol 2 Issue 3, ISSN 2412-0294
Pennings, J.M. &Smidts, A.(2000).Assessing the construct validity of risk attitude. ManagementScience,46(10),1337 - 1348.Retrieved from https://pubsonline.informs.org/doi/pdf/10. 1287/mnsc.46.10.1337.12275
Peters,G.,Clark, G., Thirlwell, J.&Kulwa, M.(2018) . Global perspective on operational Risk
Management and practice. Survey by institute of operational Risk and center for
Financial professionals. Retrieved from
Price Water House coopers. (2012). Rising to the Next Flow. A Kenya Perspective on 2012 State of the Internal Audit Profession Study, Nairobi: PWC Publication.
Price Water House coopers. (2014). Risk in Review. Re-evaluating how your Company
addresses risk. Retrieved from http://www.pwc.com/gx/en/services/auditassurance/ publications/risk-in-review.html
Regoniel, P.A. (2015). Conceptual Framework.A step by step guide on How to make one. Retrieved from http:simplyeducate.me/2015/01/05/Conceptual-framework-guide
Republic of Kenya.(2015).Mwongozo,The code of Governance for state corporations.Nairobi,Kenya:Kenya Literature Bureau.
Risk and Insurance Managing Society.(2011). Why Strategic Risk Management.Retrievedfrom https://www.rims.org/resources/ERM/Documents/FAQ%20on%20SRM%20and%20ERM%20FINAL%20April%2020%202011.pdf
Rost, M.(2017).5 steps to effective strategic risk management.Retrieved from
https://www.workiva.com/blog/5-steps-effective-strategic-risk-management
Secord, J.(2015). What is solvency Ratio and how do you use it? Retrieved March 2, 2018 from ww.kashoo.com/blog/what-is-the-solvency-ratio-and-how-do-you-use-it
Sempabwa, E. &Kariuki, P.(2017). Risk management practices and Financial performance of Commercial Banks in Rwanda.European Journal of Business and Social sciences Vol.6 pp.112-127. Retrieved from http://www.ejbss.com/Data/Sites/1/vol6no06september2017/ejbss-1906-17-enterpriseriskmanagementpractices.pdf
Strom, D. (2017). The benefits of operational Risk Management. Retrieved February 26, 2018, fromhttps://securityintelligence.com/the-benefits-of-operational-risk-management/
Soni, S. (2016). What are some potential weaknesses of stakeholder theory? Can they be remedied?Retrieved fromhttps://www.linkedin.com/pulse/what-some-potential-weaknesses-stakeholder-theory-can-sumit-soni
Stulz, R.M. (1984). Optimal hedging policies. Journal of Financial and Quantitative
Analysis, 19(2), 127-140. https://doi.org/10.2307/2330894
Tadesse, M., & Brans, M.V. (2012).Risk Coping Mechanisms and factors in the demand for micro - insurance in Ethiopia.Journal of economics and international Finance, 4(4),79-91.https://doi.org/10.5897/JEIF11.143
The National Treasury.(2017). State Corporations, Semi-Autonomous Government agencies and public Funds Consolidated Financial Statements For the year ended 30th June 2016.Retrieved from http://www.treasury.go.ke/financial-reporting-templates/consolidated-financial-statements/category/121-consolidated-financial-statements.html
United States Senate (2011).Wall Street and the financial crisis Anatomy of a Financial Collapse. Majority and Minority staff Retrieved from https;//www.hsgal.senate.gov
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2018-10-21
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Rop, E. C., & Rotich, D. G. (2018). EFFECT OF RISK MANAGEMENT PRACTICESON FINANCIAL PERFORMANCE OF COMMERCIAL STATE CORPORATIONS IN KENYA: A CASE OF JOMO KENYATTA FOUNDATION. International Journal of Finance and Accounting, 3(2), 19 – 39. https://doi.org/10.47604/ijfa.741
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