Title: Financial Risk Management and Profitability of Commercial Banks in Uganda: How Managing Credit, Market, and Liquidity Risks Impacts Bank Profitability and Stability.
Authors: Nansereko Racheal Kabuye (PhD)
Volume: 10
Issue: 2
Pages: 100-105
Publication Date: 2026/02/28
Abstract:
The study examined how managing credit, market, and liquidity risks affects the profitability and stability of commercial banks in Kampala, Uganda. The main objective was to determine the effect of financial risk management specifically credit risk, market risk, and liquidity risk on the profitability and stability of commercial banks. The study employed a descriptive and correlational research design using a quantitative approach to measure the relationship between financial risk management practices and performance indicators such as return on assets (ROA) and return on equity (ROE).The target population consisted of employees and management staff from 15 licensed commercial banks operating in Kampala City, particularly those in credit, finance, treasury, and risk management departments. A sample of 161 respondents was selected from an estimated population of 300 banking staff involved in risk-related functions. The study applied both purposive sampling (to target risk-related departments) and stratified random sampling (to ensure proportional representation of management levels and banks).Data were gathered using structured questionnaires and document review guides, which captured quantitative perceptions and supported empirical analysis. The study used survey methods for primary data collection and documentary analysis for secondary data from financial statements and regulatory reports. The results revealed a strong positive correlation between effective financial risk management and bank profitability. Credit risk management recorded the highest influence (M = 4.11, SD = 1.009), indicating that robust loan appraisal and monitoring significantly reduce non-performing loans. Market risk management (M = 3.97, SD = 1.091) and liquidity risk management (M = 3.80, SD = 1.040) also showed significant impacts, underscoring the importance of hedging, diversification, and liquidity buffers. Overall, effective management of credit, market, and liquidity risks was found to enhance profitability, operational efficiency, and institutional stability. The study concluded that proactive and integrated financial risk management is critical for sustaining profitability and resilience among Ugandan commercial banks. Proper governance, risk awareness, and compliance with regulatory liquidity and capital adequacy requirements foster stability and investor confidence. The study recommends that banks strengthen credit assessment frameworks, adopt advanced market risk monitoring tools, and maintain adequate liquidity buffers to mitigate shocks. Regulatory bodies should enhance capacity-building programs and encourage digital risk analytics adoption. Integration of enterprise-wide risk management (ERM) practices is also advised to align risk-taking with strategic profitability goals and long-term stability.