Operational risk is a fast emerging area in banking industry. Awareness of operational risk as a separate risk category has been relatively recent in most banks. It is therefore important to examine the effect of this risk on financial performance of the commercial banks. Unlike market, the operational risk factors are largely linked to internal policies and procedures of the bank. Operational risk in the banks come from different causes, including transaction and execution errors, fraud, improper business practices, product flaws, technology failures, employment discrimination, natural disasters. The Government of Kenya earmarked the banking sector as one of the key pillars to the achievement of vision 2030. Within the Medium Term Plan (2008-2012) under vision 2030, some of the target areas include development of a safe and reliable payments system that will ensure smooth transfer and settlement of funds between customers and banks as well as between banks. The aim of this study was to examine effect of operation risk exposure on financial performance of commercial banks in Kenya. Specifically the study examined effect of credit risk exposure, liquidity exposure, operation expenses exposure and operation efficiency exposure on performance of the licensed commercial banks in Kenya. The target population for the study comprised of 42 licensed Commercial Banks in Kenya. The study used secondary panel data captured from the audited annual financial reports covering 2008 to 2017. The relationship between the operation risk exposure and banks performance was done using panel data regression analysis. The analyzed data was presented using tables and figures. First, the study established insignificant and also negative relationship between credit exposure and Return on Asset. An increase in 1 unit of credit exposure resulted into a decrease in Return on Asset by -4.0810. Second, the study established significant relationship between operating expense exposure and Return on Asset. An increase in 1 unit in operating expense exposure resulted into a decrease in Return on Asset by -9.2208. Third, the study established significant relationship between operating expense exposure and Return on Asset. An increase in 1 unit of operating efficiency exposure resulted into an increase in Return on Asset by .2115709. Four, the study established significant relationship between operating efficiency exposure and Return on Asset. An increase in 1 unit of operating efficiency exposure resulted into an increase in Return on Asset by .2115709.
