Effects of Macroeconomic Factors on Financial Performance of Listed Manufacturing Firms in Kenya

Abstract

The purpose of this study was to investigate the effect of macroeconomic factors on the financial performance of listed manufacturing firms in Kenya. To achieve this objective, the study was guided by the following specific objectives: To examine the effect of inflation rate on financial performance of listed manufacturing firms in Kenya; to investigate the effect of interest rate on the financial performance of listed manufacturing firms in Kenya; and to establish the effect of exchange rate on financial performance of listed manufacturing firms in Kenya. The study used explanatory research design. The study used explanatory design because it developed a model and applied regression analysis to determine the effects of inflation rates, interest rates and exchange rates on return on equity. The independent variables were inflation rate, interest rate and exchange rate while the dependent variable was the return on equity. The target population of the study was the nine (9) listed manufacturing firms. The study employed census sampling technique. The study used secondary data which was obtained from the KNBS and CBK reports between 2009 and 2018. The return on equity was calculated by obtaining the net income and dividing it by equity from the financial statements of individual firm. The inflation rate was measured using the consumer price index, the interest rate was measured using the lending interest rate and the exchange rate was based on the KES/US Dollar. The first objective investigated the effect of inflation rate on financial performance of listed manufacturing firms in Kenya. The results revealed that the inflation rates fluctuated over the years. The lowest inflation rate was recorded in 2010 at 4.32% and the highest was recorded in 2011 at 14.02%. The largest percentage increase was recorded between 2010 and 2011 with an increase of 9.7%. The correlation results from the study showed that a negative non-significant relationship exist between inflation rate and financial performance of manufacturing firms (r = -0.176, p=0.104). The R-square was 3.1 percent and the P-value was 0.104. The results from regression indicated that an increase in one unit of inflation rate leads to a decrease in ROE by 12.4 units. The second objective examined the effect of interest rate on financial performance of listed manufacturing firms in Kenya. The results indicate that the interest rates have slightly remained stable with sight displacements. However, in 2012 the interest rate recorded a high value of 19.65% and a low of 13.67% in 2017. The largest percentage rise was recorded between 2011 and 2012 at 4.6%. The results from the Pearson correlation indicated that there is positive significant relationship between interest rate and return on equity of manufacturing firms (r = 0.229, p=0.008). The R-Square was 5.2 percent and the P-Value was 0.008. The regression results showed that an increase in one unit of interest rate leads to an increase in ROE by 14.1 units. The third objective investigated the effect of exchange rate on financial performance of listed manufacturing firms in Kenya. The results from the trend analysis showed that the exchange rate between KES against the US Dollar has been rising in most of the years. In 2017 the exchange rate hit the highest value of 103.39KES/USD as compared to its lowest year 2009 when it was 77.3 KES/USD. The largest increase was observed between 2015 and 2016 when the exchange rate rose by 10.62KES/USD. The correlation results show that a negative relationship exist between exchange rate and return on equity however it is non-significant (r = -0.071, p=0.516). The R-Square was 0.5 percent and the P-Value was 0.516. The regression analysis results indicate that an increase in 1 unit in the exchange rate produces a decrease of 0.015 units in the ROE of manufacturing firms. The study concluded that interest rate had a positive effect on financial performance and statistically significant effect on listed manufacturing firms. Inflation rate and exchange rate had a negative and statistically insignificant effect on the financial performance of listed manufacturing firms. The study recommends that the government should put in place sound monetary policies that can see stable interest rates that are not too high to hurt the manufacturers and not too low to hurt the commercial banks.