Title:
EFFECT OF OPERATIONAL RISK ON THE FINANCIAL PERFORMANCE OF BANKS IN TANZANIA

Authors:
Allen Emmanuel Mrindoko , DrSalvio Macha and Dr Raphael Gwahula ,Tanzania

Abstract:
The purpose of this paper is to examine the relationship between operations risk and the performance of Tanzanian commercial banks. The study used a panel data methodology constructed from the financial statements of all 41 commercial banks licensed and operated in Tanzania from 2006 to 2019. The data were obtained from the Bank of Tanzania and the National Bureau of Statistics. The study was based on the longitudinal explanatory design in which the quantitative approach was used to collect and analyze financial panel data of all 41 commercial banks. Data were analyzed using STATA14. The variables of operational risks that were investigated in this paper include; portfolio concentration ratio (PCR), cost to income ratio (CIR), bank leverage ratio (BLR), and Operating Expense Ratio (OER). From the results, the study indicated PCR and BLR had a negative and insignificant relationship with Return on Equity (ROE); but observed a negative and significant effect of OER and CIR on ROE. Also, regarding their impact on Return on assets (ROA), PCR and CIR were found to have a negative significant effect while BLR had a positive but insignificant impact while OER had a negative insignificant. The negative relationship implies that as PCR and CIR rise; they reduce the performance of Tanzanian commercial banks. The paper amongst others recommends that banks’ management should improve their management practices and use modern portfolio theory together with information asymmetry theory to choose less risky portfolios but also borrowers to reduce cost and risks associated with bank’ operations