Factors Affecting the Effectiveness of Enterprise Risk Management in Commercial Banks in Kenya

Abstract

The study focused on the factors that affect the effectiveness of ERM in commercial banks. The study aimed at achieving the following objectives: to establish how the responsibility for risk affects ERM in commercial banks; to assess the role of organization risk culture on the effectiveness of ERM in commercial banks; and to establish the role of the perceived benefits on the effectiveness of ERM in commercial banks. The study adopted a descriptive research design. The study population was the 43 commercial banks licensed by the Central Bank of Kenya, however of the 43 banks 3 were not active hence the banks involved in the study were 40. Census was used to collect data from the study population. The study used both descriptive and inferential as quantitative data analysis methods. Descriptive statistics was used to present the distribution of the data in frequency, percentage, mean and standard deviation. While for inferential statistics, the tests conducted were correlation, normality, linear regression and multi-linear regression. The study established that the responsibility for risk positively affects the effectiveness of ERM in commercial banks. The study revealed that the presence of a Chief Risk Officer in charge of overseeing Risk Management, and the risk champions embedded in the various functions is a key factor in contributing to the effectiveness of ERM in commercial banks. The study also revealed that clearly defined risk oversight responsibilities, and a clear mandate from the Board and Senior Leadership ensures the success of ERM. In addition, the study revealed that there should be a clear risk strategy that defines the ERM implementation process and formal training programs should be carried out to ensure that staff have a clear understanding. Finally, accountability for the risk management activities and reports should be clearly defined. The study also established that the organization risk culture positively affects the effectiveness of ERM in commercial banks. The study revealed that banks ensuring that risk management strategies are included in the corporate values of the bank significantly contributes to the effectiveness of ERM in commercial banks. The study also revealed that having a clear message from the Senior Management on the importance of ERM, decisions and behaviors of management promoting a culture of risk awareness ensures the success of ERM. The study further revealed that the roles and responsibilities for ERM should be clearly articulated with employee incentives aligned with good risk management practice. Finally, the risk appetite for each key risk should be clearly defined, approved by the Board, and aligned to the banks’ core competencies. The study further revealed that the perceived benefits play a significant role in positively affecting the effectiveness of ERM in commercial banks. The study revealed that proactive management of risk enables better insights and decision making concerning risk and strategy at all levels. The study also revealed that other benefits of ERM which include reduced performance variability, building shareholder value and the role played by ERM in determining strategy have a positive impact on the effectiveness of ERM in commercial banks. The study recommends that the banks should ensure that there is a Chief Risk Officer who reports to the Risk Management Committee of the Board. There should also be a clear mandate from the Board on ERM. In addition, there should be a clear risk strategy that defines the ERM implementation process and the accountability for risk management. Further the study recommends that risk management strategies are included in the corporate values and that a risk aware culture is embedded in the bank. The decisions and behaviors of senior management should also promote a culture of risk awareness. In addition, the risk appetite for each key risk should be clearly defined, approved by the Board, and aligned to the bank’s core competencies. Finally the study recommends that banks embrace ERM due to its benefits which include proactive management of risk, reducing performance variability, building shareholder value and role played by ERM in determining strategy.