THE EFFECT OF FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Amos Ngari Mugi, Dr. Kennedy Okiro

Abstract


This study sought to investigate the effect of foreign exchange risk management practices on the financial performance of commercial banks in Kenya. The research used a descriptive survey research design. The descriptive survey method was preferred because it ensured complete description of the situation making sure that there is minimum bias in the collection of data. The target population comprised of the forty three (43) commercial banks in Kenya from year 2009 to 2014. Census approach was used in the study. The study made use of secondary data. Data that was collected from the study sorted, edited and corded to have the required quality and accuracy. It was then entered into SPSS for generation of frequency tables, charts, correlations and regressions which was help in the analysis. The findings showed that the mean of Forward Contracts is relatively high as compared to other variables while Cross – Currency Swaps had the highest standard deviation. Options had the highest correlation and were positively correlated with Rate of return. Cross Currency Swaps and forward contracts were also highly and positively correlated with Rate of return. From the regression equation the study concluded that a unit increase in forward contracts, cross- currency swaps and options would lead to improvement on return on assets. The study recommends that; foreign exchange risk management should always be taken in to account to improve the banks return on assets and hence overall performance of the banks. Policy makers should undertake to understand risk affecting the foreign exchange markets among commercial banks to improve capital investments to maximize returns of the banks hence overall performance.

Keywords: Forward Contracts, Cross –Currency Swaps, Options, Financial Performance


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