A Survey of the Foreign Exchange Rate Risk Management Practices Adopted by Microfinance Institutions in Kenya

Abstract

Today, the economic environment in which the firms operate is highly volatile and uncertain. Increased volatility, greater interdependence and new risk have made the structure of risk exposure of corporate bodies more complex. The objective of this study was to investigate the foreign exchange risk management practices adopted by MFIs in Kenya. This research was an exploratory study. The target population of this study was the staff working at the MFIs in Kenya. The study conducted a census survey owing to the small number of microfinance institutions in Kenya. Qualitative primary data was used for the study. The questionnaire was administered to the treasury managers, finance managers , risk managers or equivalent managers who are involved in foreign exchange risk management in the selected firms using a drop and pick later technique. The primary data collected from the questionnaire was analyzed using content analysis and descriptive statistics such as measures of variation and measures of central tendency. The descriptive statistical tools helped in describing the data and determining the extent used.. The Likert scale was used to analyze the mean score and standard deviation, this will help in determining the extent to which firms use hedging techniques.The study concludes that there were various foreign exchange risk management practices adopted by micro finance institutions in Kenya. These included price adjustment, delay of payment when foreign currency was strong and delay accelerate when weak, forward covers,use of swaps, Netting and price negotiation. The least used methods of foreign risk management were prepayment/Advance payment and buying and saving currency in advance. The study further concludes that the microfinance institutions had employed various methods of measuring foreign exchange risk. These included fluctuation in demand, firm market value analysis and exposure through decrease in market share. The study recommends that microfinance institutions in Kenya need to employ risk management policies aimed at reduction of bankruptcy and distress costs, reduction in expected tax payments, reduction in expected payments to stakeholders and reduction in cost of raising funds. If a firm can implement risk management policy that eliminates the risk of bankruptcy, it essentially sets the present value of these real resources cost to zero and increases the firm value accordingly.