The Effects of foreign exchange risks on the financial performance of commercial banks in Kenya
Date
2022
Authors
Gitau, L. M.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
In a world where countries can now trade with each other, foreign exchange risk has become one of the key factors affecting the performance of companies all over the world. The banking industry may argue that it one of the most affected industries by this risk. In Kenya, banks provide foreign currency at rates regulated by the Central Bank of Kenya. The rates vary on each day whether it goes up or down it will have a positive and negative effect on the performance of banks respectively. Empirical review has shown various results. Some have shown that variations in the foreign exchange risk does affect the performance of banks while others have dismissed this notion. This study seeked to determine the effect of foreign exchange risk on the financial performance of commercial banks in Kenya. The study specifically identified the foreign exchange risks facing commercial banks in Kenya and determined the effect of the foreign exchange risk on the financial performance on commercial banks in Kenya. The theories that formed the basis of the study were risk management theory, finance distress theory and international fisher's effect theory. The study adopted a descriptive research design. The unit of analysis was banks located in Kenya and regulated by the Central Bank of Kenya. All banks registered by the end of December 2020 were analysed and no sampling occurred. The population for the secondary data were the 41 commercial banks in Kenya of which two were under receivership and one under statutory management. Data was collected from 25 commercial banks that had data for the 5 years being studied that is 2016 to 2020 which was obtained from the Central Bank of Kenya website. No primary data was used only secondary data. Descriptive statistics, regression analysis and correlation analysis were used for analysing the data using SPSS software. The findings were for a short period to be able to bring out the effect of foreign exchange risk and its control variables on the commercial banks' performance. The main foreign exchange risk was the fluctuation of the Kenyan shilling. The foreign exchange risk measured using US Dollar, Tanzanian shillings and Ugandan shilling had a positive relationship with performance apart from the Tanzanian shilling which had a negative relationship. For the control variables i.e. liquidity risk, credit risk and interest rate risk all had a positive relationship with the performance of banks. The research recommended that the Central Bank will need to liaise with the government to ensure the Kenyan Shilling improves its performance. The commercial banks to trade using foreign currencies so that their performance increases.
Description
Full - text undergraduate research project
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Citation
Gitau, L. M. (2022). The Effects of foreign exchange risks on the financial performance of commercial banks in Kenya [Strathmore University]. http://hdl.handle.net/11071/16022