THE MODERATING EFFECT OF FIRM SIZE ON THE RELATIONSHIP BETWEEN ENVIRONMENTAL RISK AND THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Financial institutions play a key role in spurring the growth of the economy. However, banks operate in a highly volatile environment which threatens their ability to achieve their desired goals. The purpose of this study was to establish the moderating effect of firm size on the relationship between environmental risk and the financial performance of commercial banks in Kenya. The study was anchored on the growth of the firm theory. Longitudinal and cross-sectional research design was used. The population of the study was 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. Secondary panel data collected using an extraction tool validated by experts from banks and academia was analyzed using R statistical software version 4.3.2. Reliability of the data was ensured by using audited financial reports. Descriptive and inferential data analysis techniques were used. Mixed effects regression model to assess the moderating effect of environmental risk on financial performance of commercial banks showed that firm size significantly moderates the relationship between environmental risk and financial performance of commercial banks in Kenya. The number of branches shows a significant moderating effect in tier 3 banks compared to tier 1, where a higher number of branches negatively affects ROA (beta: -0.22, 95% CI: (-0.31 – -0.14), p-value: <0.01). The study concluded that there is a statistically significant moderating effect of firm size on the relationship between environmental risk and the financial performance.