The Effect of Foreign Exchange Risk Management on the Financial Performance of Commercial Banks in Kenya: A Case of Stanbic Bank

Abstract

The objective of the study was to establish the effect of foreign exchange risk management on the financial performance of commercial banks in Kenya. The objective of the study were: What are the different methods of foreign exchange risk management used by commercial banks? What is the effect of foreign exchange risk on financial performance of commercial banks in Kenya? What are the methods used by commercial banks to predict forex and to manage the effect on financial performance? The research used a descriptive research design. The target population comprised 100 employees in finance and treasury at Stanbic bank Kenya. The study used applied the sample size formula and arrived at a sample size of 80 employees out of which only 70 responded. The study made use of secondary data. The multiple linear regression analysis was applied to examine the extent of influence of the independent variable on the dependent variables. The findings on the first objective revealed that majority agreed that the firm sets extensive budgeting systems to handle currency risk projections, it was also revealed that the institution has an up-to-date system that helps in handling currency risk projections. The study was set to financial instruments and techniques used by the bank to hedge against foreign exchange risk. The findings revealed that the frequently used hedging techniques are Cross-Currency Swaps, Options, and price adjustments. The findings on the second objective revealed that majority agreed that liquidity risk has an effect on return on assets and return on equity, sound and dynamic financial risk management practices has translated into competitive advantage, and they apply more weight to assess the risk exposure during decision making. In addition, it was also revealed that the firm faces both internal and external financial risks. For the third objective on the methods used to predict and manage foreign exchange, the findings revealed that majority frequently used foreign exchange exposure theory to manage foreign exchange. On the performance of the bank the findings revealed that most of the respondents agreed that the bank had the required level of capital to enable it withstand risks, management is efficient to determine the level of costs and profitability, and has seen increased ROE and ROA over the years. A correlation analysis was done between financial performance and methods of foreign exchange risk management, and methods used by commercial banks to predict forex and manage the effect on financial vii performance revealed that there was a significant positive relationship between performance and Risk management The study concluded that uncertainty on the firm often carrying out foreign exchange exposure projections is an issue that firms need to address with immediate urgency. Stanbic bank is committed to hedge against forex risk by utilizing techniques such as Cross-Currency Swaps, Options, and price adjustments. It was also concluded that despite forex risk being an issue in the financial sector, liquidity risk also has an effect on return on assets and return on equity. The study also concluded that the bank has also increased performance and this could be as a result of the set funds to enable it to mitigate the risks, management is efficient to determine the level of costs and profitability, The study recommended that the banks need carry out regular foreign exchange exposure projections in order to minimize some of the risks associated with foreign exchange risks. The firms also need to utilize the financial instruments and techniques effectively in order to better hedge against foreign exchange risk. The institution also needs to put special emphasis on liquidity management in order to minimize its risks as it has an effect on return on assets and return on equity.There is a need for education on the methods used to predict and manage foreign exchange and select the most appropriate method. Banks need to undertake effective cash management in order to have the required level of capital to enable it withstand risks. For further studies there is a need to undertake a similar study in other commercial banks so as to be able to generalize the findings.