Abstract:
Operational risk threatens banks financial viability and long-term sustainability. The purpose of
this paper is to explore the effect of operational risk on financial performance of commercial
banks in Kenya. The qualitative research design and ordered logistic model were employed. The
data was analysed with the aid of STATA software. The conclusion of the study was that there
exists an inverse relationship between operational risk and financial performance. The study also
finds that bank size moderates the effect internal and external fraud on financial performance of
commercial banks in Kenya by shrinking it. Bank size moderates the effect execution, delivery
and process management on financial performance of commercial banks in Kenya by enhancing
it. Commercial banks’ management should adhere to the guidelines and procedures provided by
the Central bank of Kenya on operational risk management.
