Relationship between Reputational Risk and Financial Performance of Commercial Banks in Kenya

Abstract

Financial institutions play a key role in spurring the growth of the economy. The purpose of this study was to determine the relationship between reputational risk and the financial performance of commercial banks in Kenya. The study was anchored on agency theory, stakeholder theory and prospect theory. The population of the study was forty - two (42) commercial banks in Kenya. 32 purposively sampled commercial banks which had audited financial accounts for the years 2016 to 2021 were included in the study. ROA and ROE were used to measure performance while CSR activities and total loans were used to indicate reputational risk. Mixed effects regression model showed that for ROE, the presence of CSR yields an estimate of 0.85 (p=0.754), suggesting a slight insignificant positive effect and for ROA, an estimate of 0.65 (p=0.306), implying a modest insignificant positive effect. Total loans, for ROE, the estimate is -0.15, suggesting a negative relationship, though not statistically significant (p-value of 0.671). For ROA, estimate 0.09, indicating a positive relationship between total loans and ROA. However, this positive effect is also not statistically significant, as the p-value stands at 0.300. This research concluded that there is a link between reputational risk and financial performance of Kenyan commercial banks and recommended that banks engage in CSR activities to boost their reputation among stakeholders and attract business thus better performance.